Fundamentals news, global liquidity and macroprudential policy

Abstract

We study optimal macroprudential policy in a model in which unconventional shocks, in the form of news about future fundamentals and regime changes in world interest rates, interact with collateral constraints in driving the dynamics of financial crises. These shocks strengthen incentives to borrow in good times (i.e. when "good news" about future fundamentals coincide with a low-world-interest-rate regime), thereby increasing vulnerability to crises and enlarging the pecuniary externality due to the collateral constraints. Quantitatively, an optimal schedule of macroprudential debt taxes can lower the frequency and magnitude of financial crises, but the policy is complex because it features significant variation across interest-rate regimes and news realizations.

Evaluation Of Macroprudential Policy On Credit Growth In Indonesia: Credit Registry Data Approach

“…Figure 1 explains how the implementation of macro-prudential policies in mitigating procyclical credit growth will have systemic risk impacts. Procyclical credit behavior has the potential to cause systemic risk (Arnold et al, 2012;López et al, 2014;Bianchi et al, 2016). Implications of macro-prudential policy as a whole are still weak due to loan growth there is procyclical.…”

“…Research conducted by Arnold et al (2012); Shi et al (2014); Tomuleasa, (2015); Tovar et al (2012) explain the importance of macro-prudential policy in minimizing systemic risk in the financial system. Systemic risk may stem from a trend of financial cycles following the economic cycle, as well as with procyclical credit growth having potential as a systemic risk (Arnold et al, 2012;López, et al, 2014;Bianchi, et al, 2016). Research López et al (2014); Bianchi, et al (2016) provide an overview in mitigating systemic risk arising from the procyclical credit growth of an early warning system.…”

“…Systemic risk may stem from a trend of financial cycles following the economic cycle, as well as with procyclical credit growth having potential as a systemic risk (Arnold et al, 2012;López, et al, 2014;Bianchi, et al, 2016). Research López et al (2014); Bianchi, et al (2016) provide an overview in mitigating systemic risk arising from the procyclical credit growth of an early warning system.…”

Optimal v. simple financial policy rules in a production economy with “liability dollarization”

“…The model we propose is based on the one developed by Bianchi et al (2016), who introduced noisy news about future economic fundamentals and regime shifts in global liquidity to the workhorse model of macroprudential policy with liability dollarization. We modify this setup by introducing production of tradable and nontradable goods using intermediate goods.…”

Macroeconomic Implications of Financial Imperfections: A Survey

“…policy includes Bianchi et al (2012Bianchi et al ( , 2016, Farhi and Werning (2016) and Bianchi and Mendoza (forthcoming).…”