TY  - JOUR
AU  - Farhi, Emmanuel
AU  - Werning, Iván
TI  - A Theory of Macroprudential Policies in the Presence of Nominal Rigidities
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19313
PY  - 2013
Y2  - August 2013
DO  - 10.3386/w19313
UR  - http://www.nber.org/papers/w19313
L1  - http://www.nber.org/papers/w19313.pdf
N1  - Author contact info:
Emmanuel Farhi
Harvard University
E-Mail: *NA user is deceased

Iván Werning
Department of Economics, E52-536
MIT
77 Massachusetts Avenue
Cambridge, MA 02139
Tel: 617/452-3662
Fax: 617/253-1330
E-Mail: iwerning@mit.edu
AB  - We propose a theory of monetary policy and macroprudential interventions in financial markets. We focus on economies with nominal rigidities in goods and labor markets and subject to constraints on monetary policy, such as the zero lower bound or fixed exchange rates. We identify an aggregate demand externality that can be corrected by macroprudential interventions in financial markets. Ex post, the distribution of wealth across agents affects aggregate demand and output. Ex ante, however, these effects are not internalized in private financial decisions. We provide a simple formula for the required financial interventions that depends on a small number of measurable sufficient statistics. We also characterize optimal monetary policy. We extend our framework to incorporate pecuniary externalities, providing a unified approach to both externalities. Finally, we provide a number of applications which illustrate the relevance of our theory.
ER  -