NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Optimal Policy for Macro-Financial Stability

Gianluca Benigno, Huigang Chen, Christopher Otrok, Alessandro Rebucci, Eric R. Young

NBER Working Paper No. 26397
Issued in October 2019
NBER Program(s):Economic Fluctuations and Growth Program, International Finance and Macroeconomics Program, Monetary Economics Program

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.

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Document Object Identifier (DOI): 10.3386/w26397

 
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