Optimal Policy for Macro-Financial Stability

26 Pages Posted: 21 Oct 2019

See all articles by Gianluca Benigno

Gianluca Benigno

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

Huigang Chen

Uber Technologies, Inc.

Chris Otrok

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

Alessandro Rebucci

Johns Hopkins University - Carey Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Eric R. Young

University of Virginia

Multiple version iconThere are 6 versions of this paper

Date Written: October 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 the same set of policy tools that implement the constrained efficient allocation can be used by a Ramsey planner to replicate the unconstrained allocation, thus achieving higher welfare. The constrained social planner approach may lead to inaccurate characterizations of welfare-maximizing policies relative to the Ramsey approach.

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 Benigno, Gianluca and Chen, Huigang and Otrok, Christopher and Rebucci, Alessandro and Young, Eric R., Optimal Policy for Macro-Financial Stability (October 2019). FRB of New York Staff Report No. 899, October 2019, Available at SSRN: https://ssrn.com/abstract=3472022 or http://dx.doi.org/10.2139/ssrn.3472022

Gianluca Benigno (Contact Author)

Federal Reserve Bank of New York ( email )

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

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Huigang Chen

Uber Technologies, Inc. ( email )

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Christopher Otrok

University of Missouri ( email )

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Alessandro Rebucci

Johns Hopkins University - Carey Business School ( 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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