Cover IMF Working Papers
Optimal Macroprudential Policy and Asset Price Bubbles
Author: Nina Biljanovska, Lucyna Gornicka, and Alexandros Vardoulakis
Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 184
Language:
English
Publication Date:
30 Aug 2019
DOI:
https://doi.org/10.5089/9781513511078.001
ISBN:
9781513511078
ISSN:
1018-5941
Pages:
44
Keywords:
WP; marginal utility; real asset; transition probability; Collateral constraints; rational bubbles; macroprudential regulation; optimal policy; asset price bubble; collateral constraint; credit imbalance; equilibrium asset pricing; bubble component; Collateral; Asset bubbles; Asset prices; Credit; Consumption; Global; deflating bubble; borrowing constraint; bubble bursting; stock market bubble; asset price overvaluation; Stock markets
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding collateral constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund