Robust Macro-Prudential and Regulatory Policies under Model Uncertainty (joint with M. Binder, J. Quintana and V. Wieland)

Abstract:

We analyze macroprudential policy rules that are robust to model uncertainty across a range of DSGE models with a banking sector. Our results favor a regime where the monetary authority acts as Stackelberg leader. Employing the monetary policy rule of Orphanides and Wieland (2013) as a benchmark, this leader-follower regime is able to yield low inflation volatility without necessarily increasing the volatility of credit. In contrast, perfect-coordination-rules are not robust to model uncertainty and thus potentially imply large welfare losses. The best-performing robust macroprudential policies are modestly countercyclical and persistent CTA and LTV ratios. Robust policies under the perfect-coordination regime lead to passive monetary policy rules that increase the volatility of inflation and the output gap, while generating only marginal gains in credit gap stabilization.