Optimal Policy for Macro-Financial Stability / Gianluca Benigno, Huigang Chen, Christopher Otrok, Alessandro Rebucci, Eric R. Young.

Format:

Book

Author/Creator:

Benigno, Gianluca.

Contributor:

National Bureau of Economic Research.

Chen, Huigang.

Otrok, Christopher.

Rebucci, Alessandro.

Young, Eric R.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26397.

NBER working paper series no. w26397

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

There is a new and now extensive literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. These normative analyses often 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 optimally by a Ramsey planner to replicate the unconstrained allocation, thus achieving higher welfare. We establish this in the context of a well-known model economy, but the result is relevant whenever the policy instrument that is assigned to the planner can affect the market price that determines the value of collateral in the borrowing constraint. The result implies that a robust normative analysis in this model class requires explicit computations of the Ramsey optimal policy problem.

Notes:

Print version record

October 2019.