Optimal Macroprudential Policy and Asset Price Bubbles

45 Pages Posted: 23 Sep 2019

See all articles by Nina Biljanovska

Nina Biljanovska

International Monetary Fund (IMF)

Lucyna Górnicka

IMF

Alexandros Vardoulakis

Board of Governors of the Federal Reserve System

Date Written: August 2019

Abstract

An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding collateral constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.

Keywords: Economic conditions, Financial crises, Demand, Economic stabilization, Price indexes, Collateral constraints, rational bubbles, macroprudential regulation, optimal policy, WP, asset price bubble, overvaluation, asset price, Euler equation, bubble

JEL Classification: E2, E44, G2, G1, E01, G12, E52, E63, O4

Suggested Citation

Biljanovska, Nina and Górnicka, Lucyna and Vardoulakis, Alexandros, Optimal Macroprudential Policy and Asset Price Bubbles (August 2019). IMF Working Paper No. 19/184, Available at SSRN: https://ssrn.com/abstract=3457772

Nina Biljanovska (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Lucyna Górnicka

IMF ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alexandros Vardoulakis

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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