Optimal Macroprudential Policy and Asset Price Bubbles

Author/Editor:

Nina Biljanovska ; Lucyna Gornicka ; Alexandros Vardoulakis

Publication Date:

August 30, 2019

Electronic Access:

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Disclaimer: 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.

Summary:

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.

Series:

Working Paper No. 19/184

Subject:

English

Publication Date:

August 30, 2019

ISBN/ISSN:

9781513511078/1018-5941

Stock No:

WPIEA2019184

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

44

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