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Bianchi, Javier; Liu, Chenxin; Mendoza, Enrique G.
Journal of international economics, 03/2016, Volume: 99Journal Article
We study optimal macroprudential policy in a model in which unconventional shocks, in the form of news about future fundamentals and regime changes in world interest rates, interact with collateral constraints in driving the dynamics of financial crises. These shocks strengthen incentives to borrow in good times (i.e. when “good news” about future fundamentals coincide with a low-world-interest-rate regime), thereby increasing vulnerability to crises and enlarging the pecuniary externality due to the collateral constraints. Quantitatively, an optimal schedule of macroprudential debt taxes can lower the frequency and magnitude of financial crises, but the policy is complex because it features significant variation across interest-rate regimes and news realizations. •We investigate the macroprudential policy design with news and interest rate shocks.•Good news and low interest rate raise the vulnerability to financial crises.•Macroprudential policy requires significant variation across states.
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