TY  - JOUR
AU  - Bianchi, Javier
AU  - Mendoza, Enrique G
TI  - Optimal Time-Consistent Macroprudential Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19704
PY  - 2013
Y2  - December 2013
DO  - 10.3386/w19704
UR  - http://www.nber.org/papers/w19704
L1  - http://www.nber.org/papers/w19704.pdf
N1  - Author contact info:
Javier Bianchi
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN 55401
E-Mail: javieribianchi@gmail.com

Enrique G. Mendoza
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215-898-7701
E-Mail: egme@sas.upenn.edu
AB  - Collateral constraints widely used in models of financial crises feature a pecuniary externality: Agents do not internalize how borrowing decisions taken in “good times” affect collateral prices during a crisis. We show that agents in a competitive equilibrium borrow more than a financial regulator who internalizes this externality. We also find, however, that under commitment the regulator's plans are time-inconsistent, and hence focus on studying optimal, time-consistent policy without commitment. This policy features a state-contingent macroprudential debt tax that is strictly positive at date t if a crisis has positive probability at t + 1. Quantitatively, this policy reduces sharply the frequency and magnitude of crises, removes fat tails from the distribution of returns, and increases social welfare. In contrast, constant debt taxes are ineffective and can be welfare-reducing, while an optimized “macroprudential Taylor rule” is effective but less so than the optimal policy.
ER  -