Optimal Macroprudential Policy and Asset Price Bubbles

Optimal Macroprudential Policy and Asset Price Bubbles
Author: Nina Biljanovska
Publisher: International Monetary Fund
Total Pages: 51
Release: 2019-08-30
Genre: Business & Economics
ISBN: 1513511076


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An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding collateral constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.


Optimal Macroprudential Policy and Asset Price Bubbles
Language: en
Pages: 51
Authors: Nina Biljanovska
Categories: Business & Economics
Type: BOOK - Published: 2019-08-30 - Publisher: International Monetary Fund

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The financial crisis of 2008 is probably the single most important economic event in post-war history. Macroprudential policy is the response to that crisis –