In this paper, we use a DSGE model to study the passive and time-varying implementation of
macroprudential policy when policymakers have noisy and lagged data, as commonly observed in lowincome
and developing countries (LIDCs). The model features an economy with two agents; households and
entrepreneurs. Entrepreneurs are the borrowers in this economy and need capital as collateral to obtain loans.
The macroprudential regulator uses the collateral requirement as the policy instrument. In this set-up, we
compare policy performances of permanently increasing the collateral requirement (passive policy) versus a
time-varying (active) policy which responds to credit developments. Results show that with perfect and
timely information, an active approach is welfare superior, since it is more effective in providing financial
stability with no long-run output cost. If the policymaker is not able to observe the economic conditions
perfectly or observe with a lag, a cautious (less aggressive) policy or even a passive approach may be
preferred. However, the latter comes at the expense of increasing inequality and a long-run output cost. The
results therefore point to the need for a more careful consideration toward the passive policy, which is
usually advocated for LIDCs.