Macroprudential Policy with Learning from Credit Spreads and Misperception

Abstract

This paper examines how information frictions affect the conduct of macroprudential policy. Since macroprudential policy directly influences credit prices, it can impact beliefs when agents learn from credit spreads and experience policy misperception. We show that when agents do not accurately internalize and account for the policy effects on credit spreads, they mistakenly attribute changes in credit prices to the aggregate state. Consequently, agents erroneously update their beliefs about the aggregate state, even when the underlying aggregate state remains unchanged. Our findings suggest that instead of correcting externalities with policies, externalities can arise due to policy actions. The optimal policy adjustments depend on whether policy misperception and learning from credit spreads amplify or dampen the initial policy effect. To prevent sub-optimal outcomes, we highlight the importance of clear central bank communication.

Keywords: Credit Cycles, Macroprudential Policies, Information Frictions, Financial Stability, Learning from Credit Spreads, Misperception, Central Bank Communication

JEL Classification: E32, E44, G1, G12