Optimal Policy for Macro-Financial Stability

34 Pages Posted: 11 Aug 2019 Last revised: 20 Feb 2020

See all articles by Gianluca Benigno

Gianluca Benigno

London School of Economics & Political Science (LSE) - Department of Economics; Federal Reserve Bank of New York

Huigang Chen

MarketShare Partners

Chris Otrok

University of Missouri; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Eric R. Young

University of Virginia

Multiple version iconThere are 6 versions of this paper

Date Written: August 7, 2019

Abstract

There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. These normative analyses build upon the concept of constrained efficient allocation where the social planner is constrained by the same borrowing limit that agents face. In this paper, we show that there exists at least one set of tools that implement the constrained efficient allocation that can also be used by a Ramsey planner to replicate an unconstrained allocation, achieving higher welfare. Constrained efficiency may lead to inaccurate characterizations of welfare-maximizing policies relative to Ramsey optimal policy.

Keywords: Constrained efficiency, Financial crises, Macroprudential policies and capital controls, Pecuniary externalities, Ramsey optimal policy, Social planner

JEL Classification: E61, F38, F44, H23

Suggested Citation

Benigno, Gianluca and Chen, Huigang and Otrok, Christopher and Rebucci, Alessandro and Young, Eric R., Optimal Policy for Macro-Financial Stability (August 7, 2019). Available at SSRN: https://ssrn.com/abstract=3433523 or http://dx.doi.org/10.2139/ssrn.3433523

Gianluca Benigno

London School of Economics & Political Science (LSE) - Department of Economics ( email )

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Federal Reserve Bank of New York ( email )

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Huigang Chen

MarketShare Partners ( email )

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Christopher Otrok

University of Missouri ( email )

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Alessandro Rebucci (Contact Author)

Johns Hopkins University - Carey Business School ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Eric R. Young

University of Virginia ( email )

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