IMF Working Papers

Optimal Macroprudential Policy and Asset Price Bubbles

By Nina Biljanovska, Lucyna Gornicka, Alexandros Vardoulakis

August 30, 2019

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Nina Biljanovska, Lucyna Gornicka, and Alexandros Vardoulakis. Optimal Macroprudential Policy and Asset Price Bubbles, (USA: International Monetary Fund, 2019) accessed November 12, 2024

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.

Subject: Asset bubbles, Asset prices, Collateral, Consumption, Credit, Financial crises, Financial institutions, Financial markets, Money, National accounts, Prices, Stock markets

Keywords: Asset bubbles, Asset price bubble, Asset price overvaluation, Asset prices, Borrowing constraint, Bubble bursting, Bubble component, Collateral, Collateral constraint, Collateral constraints, Consumption, Credit, Credit imbalance, Deflating bubble, Equilibrium asset pricing, Global, Macroprudential regulation, Marginal utility, Optimal policy, Rational bubbles, Real asset, Stock market bubble, Stock markets, Transition probability, WP

Publication Details

  • Pages:

    44

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2019/184

  • Stock No:

    WPIEA2019184

  • ISBN:

    9781513511078

  • ISSN:

    1018-5941