## Robust Optimal Macroprudential Policy

_IMF Working Papers, February 26, 2021_

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## Bibliographic details
- Authors: Giselle Montamat, Francisco Roch
- Published: February 26, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513570754.001

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### Overview
- The paper analyzes how fear of model misspecification by the planner and/or households affects welfare gains from optimal macroprudential taxes.
- The setting is an economy with occasionally binding collateral constraints as in Bianchi (2011).
- Robust policy is interpreted in the Hansen and Sargent (2011) sense: policies that are optimal under a "worst-case" model of shocks.

### Main findings
- There exist welfare gains from internalizing how borrowing decisions in good times affect the value of collateral during a crisis.
- A planner who designs policy to be robust to model misspecification can produce negligible welfare gains, or even welfare losses, if the planner's worst-case model is far from the true underlying distribution of shocks.
- A robust planner introduces taxes that are 5 percentage points higher but does not achieve a significant increase in welfare gains compared to a non-robust planner when the true underlying model is not the worst-case.
- If households also make choices that are robust to model misspecification, welfare gains are significantly reduced.
- A highly-robust planner, when households behave robustly, can "underborrow" and induce welfare losses.
- If the worst-case scenario assumed by the robust planner is realized, welfare gains are the largest possible.

### Policy implications
- Internalizing the impact of good-time borrowing on crisis-period collateral values can yield welfare improvements.
- Designing macroprudential taxes under model uncertainty requires careful assessment of how far the planner's perceived worst-case deviates from plausible true distributions; excessive robustness can be counterproductive.
- Policymakers should consider the interaction between planner robustness and household robustness: when households are themselves robust in choices, planner robustness may need to be calibrated downward to avoid underborrowing and welfare losses.

### Scenarios and robustness considerations
- Non-worst-case true model: Robust planner raises taxes by 5 percentage points but gains are negligible relative to non-robust planner.
- Households robust and planner highly robust: Interaction can produce underborrowing and welfare losses.
- Worst-case realized: Robust planner attains the largest possible welfare gains.

### Key statistics and publication identifiers
- Pages: 61
- Series: Working Paper No. 2021/055
- Volume: 2021
- Issue: 055
- DOI: https://doi.org/10.5089/9781513570754.001

*Source: Robust Optimal Macroprudential Policy, Giselle Montamat and Francisco Roch.*

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_Source: https://www.imf.org/en/publications/wp/issues/2021/02/27/robust-optimal-macroprudential-policy-50118_