Optimal policy for macro financial stability

Gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, eric r. Louis working papers other than an acknowledgment that the writer has had access to unpublished material should be cleared with the author or authors. Apr, 2015 for example, there are no futures markets, and thus no marketbased expectations, for the unemployment rate. Apr 21, 20 if, however, the policymaker has access to two instruments, it is optimal to act only during crisis times. Christopher otrok university of missouri federal reserve bank of st. Financial stability, growth and macroprudential policy. A relevant organization is one whose policy positions, goals, or financial interests relate to the article. In general, during a crisis, the optimal policy with commitment will involve both using capital inflow taxes or subsidies as well as departing from inflation stability. Bailouts, capital controls, exchange rate policy, financial crises, financial frictions, macro financial stability, macro prudential policies.

Optimal policy is fairly well approximated by a flexible targeting rule, which stabilizes a basket composed of domestic price inflation, exchange. Bank capital, financial stability and basel regulation in a. Optimal policy for macrofinancial stability fed in print. The role of the interest rate lorenzo menna martin tobal the global financial crisis opened a debate on whether inflation target regimes must be relaxed and allow for monetary policy to address financial stability concerns. The link between financial regulations, both micro and macroprudential, and. If, however, the policymaker has access to two instruments, it is optimal to act only during crisis times. Optimal policy for macrofinancial stability by gianluca. Optimal policy for macro financial stability gianluca benigno federal reserve bank of new york lse and cepr huigang chen uber technologies inc. Young federal reserve bank of new york staff reports, no. These findings raise the question of whether and to what extent the highlighted spillovers have shaped the overall impact of targeted microprudential policy on financial stability. For a monetary policymaker with a dual mandate for both price stability and maximum employmentlike the federal reservemonetary policy cannot rely only on marketbased expectations, since none exist for a key macroeconomic variable.

Optimal policy for macrofinancial stability, nber working papers 26397, national bureau of economic research, inc. However, there are new challenges to the conduct of these macro financial stabilization policies. Optimal policy for macrofinancial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, and eric r. Optimal policy for macro financial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, eric r. The views expressed in this paper are those of the authors and do not necessarily. Preventive measures acting in this direction are known between researchers and policy makers as macroprudential policies. E61, f38, f44, h23 abstract there is a new and now large literature analyzing government policies for financial stability. Citeseerx optimal policy for macrofinancial stability. Optimal policy for macro financial stability, cepr discussion papers 9223, c. No 899, staff reports from federal reserve bank of new york. Optimal policy for macrofinancial stability request pdf. Benigno, gianluca and chen, huigang and otrok, christopher and rebucci, alessandro and young, eric, optimal policy for macrofinancial stability december 2012. Nonetheless, this debate has focused on the ability of the interest rate to lean against the wind and, more generally, on the accumulation of systemic risk arising from the macrofinancial challenges faced by advanced economies. There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints.

Spillovers and the optimal design of macroprudential measures. Moreover, we also show that their optimal combination is closer in terms of both financial stability and social welfare to the optimal standalone macroprudential policy than to the optimal standalone monetary policy. Mar 27, 2019 in particular, we show that tightening monetary and macroprudential policies, on their own, increase welfare. The link between financial regulations, both micro and macro prudential, and. No 26397, nber working papers from national bureau of economic research, inc. Optimal policy for macrofinancial stability, staff reports 899, federal reserve bank of new york. Financial stability and optimal interestrate policy andrea ajello thomas laubach david l opezsalido taisuke nakata federal reserve board august 2016 abstract we study optimal interestrate policy in a new keynesian model in which the economy can experience nancial crises and the probability of a crisis depends on credit conditions. Optimal policy for macro financial stability, nber working papers 26397, national bureau of economic research, inc.

Jan 14, 2020 spillovers and the optimality of sectorally targeted macroprudential policy. Apr 16, 2012 what the maths tells you is the following. Optimal policy for macrofinancial stability gianluca benigno london school of economics huigang chen marketshare partners christopher otrok university of missouri federal reserve bank of st. Optimal policy for macro financial stability, 20 meeting papers 636, society for economic dynamics. I hold no paid or unpaid position in any relevant organization. If you wish to purchase the right to make copies of this paper for distribution to others, please select the quantity. Suppose also that policy did tighten to head off the possibility of a crisis, and this led to lower output and inflation than would otherwise have. Monetary policy, macroprudential policy, and financial stability. Suppose the optimal policy when a financial crisis is endogenous is expressed in the form of a modified price target like the one i have just described. This debate revolves around the role of monetary and. Online appendixes to financial stability and optimal interest. Louis alessandro rebucci interamerican development bank eric r.

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. Gianluca benigno, huigang chen, christopher otrok, alessandro rebucci and eric young. One of the major changes in this new international economic environment is a significant decline in the neutral real interest. Financial regulations and macroeconomic stability1. Economic fluctuations and growth, international finance and macroeconomics, monetary economics. Optimal policy for macrofinancial stability federal.

This paper studies whether policymakers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We show however that even with commitment, optimal policy is never macro prudential, either in monetary policy or capital inflow taxes. Optimal policy for macrofinancial stability this paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. Third and finally, the paper proposes a computational algorithm to solve markovperfect optimal policy for problems in which the policy function is not differentiable. Louis alessandro rebucci johns hopkins university cepr and nber eric r. Unlike the existing literature, there is a new policy tradeoff between the cyclical and trend consumption growth. Optimal policy for macrofinancial stability gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, eric r. Modeling issues related to emerging economies such as optimal policy against capital flow volatility. Optimal policy for macro financial stability by gianluca benigno, huigang chen, christopher otrok, alessandro rebucci, eric r. References in publications to federal reserve bank of st.

By gianluca benigno, huigang chen, christopher otrok, alessandro rebucci and eric young. Optimal policy for macrofinancial stability working papers. These normative analyses build upon the concept of constrained efficient allocation, where the social planner is constrained by the same. What types of tools can be devised in order to contain risks to financial stability. Capital controls, capital flows, exchange rate policy, financial frictions, financial crises, macro financial stability, prudential policies. Feb 01, 20 third and finally, we propose a computational algorithm to solve markovperfect optimal policy for problems in which the policy function is not differentiable. Optimal policy for macrofinancial stability gianluca benigno federal reserve bank of new york lse and cepr huigang chen uber technologies inc.

Optimal policy for macrofinancial stability gianluca. Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macrofinancial stability, macroprudential policies. Optimal monetary and prudential policies request pdf. Citeseerx research division federal reserve bank of st. Moreover, even in the presence of a risktaking channel of monetary policy that creates an effect of monetary policy on financial stability, optimal policy can still be implemented by assigning a. Young there is a new and now extensive literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. Our numerical results show that the optimal combination of both policies is closer in terms of both nancial stability and social welfare to the optimal standalone macropudential policy, which are in turn higher than those that can be obtained with the optimal stand.