Working Paper: NBER ID: w29204
Authors: Pablo Ottonello; Diego J. Perez; Paolo Varraso
Abstract: We study the design of macroprudential policies based on quantitative collateral-constraint models. We show that the desirability of macroprudential policies critically depends on the specific form of collateral used in debt contracts: While inefficiencies arise when current prices affect collateral---a frequent benchmark used to guide policies---they do not when only future prices affect collateral. Since the microfoundations and quantitative predictions of models with future-price collateral constraints do not appear less plausible than those using current prices, we conclude that additional empirical work is essential for the use of these models in macroprudential policy design.
Keywords: macroprudential policy; collateral constraints; financial stability
JEL Codes: E32; E44; F32; F36; F38; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| form of collateral used in debt contracts (G33) | desirability of macroprudential policies (E61) |
| current prices affect collateral (G19) | inefficiencies arise (D61) |
| only future prices affect collateral (G13) | no inefficiencies arise (D61) |
| choice of collateral form (G33) | impact on model's validity for policy design (C52) |
| absence of macroprudential policies (E60) | constrained inefficiency (D61) |
| not implementing macroprudential policies in an inefficient economy with current income collateral (E19) | large welfare costs (D69) |
| capital controls (F38) | welfare losses (D69) |