Working Paper: CEPR ID: DP13816
Authors: Facundo Piguillem; Jean Flemming; Jean-Paul Lhuillier
Abstract: We analyze the optimal macroprudential policy under the presence of news shocks. News areshocks to the growth rate that convey information about future growth. In this context, crisesare characterized by long periods with positive shocks (and good news) that eventually revert,rendering the collateral constraint binding and triggering deleveraging. In this environmentit is optimal to tax borrowing during good times, and let agents act freely leaving theallocations undistorted, including borrowing and lending, when the economy reverts to abad state. We contrast our findings to the case of standard, shocks to the level of income,where it is optimal to tax debt in bad times, when agents need to borrow the most forprecautionary savings motives. Also, taxes are used much less often and are around one-tenthof those under level shocks.
Keywords: macroprudential policy; financial crises; pecuniary externality
JEL Codes: E32; E44; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| persistent trend shocks (E32) | procyclical macroprudential policy (E60) |
| standard level shocks (L15) | countercyclical macroprudential policy (E60) |
| positive growth shocks (O49) | increased borrowing by agents (G21) |
| increased borrowing by agents (G21) | binding constraints when economy reverts to bad state (E32) |
| frequency of optimal debt taxation under trend shocks (H21) | lower than under level shocks (E39) |
| magnitude of taxes under trend shocks (H29) | about one-tenth of those under level shocks (D80) |