Macroprodential Policy under Uncertainty

by Saleem Bahaj and Angus Foulis
Bank of England and Centre for Macroeconomics

Abstract

We argue that uncertainty over the impact of macroprudential policy need not make a policymaker more cautious. Our starting point is the classic finding of Brainard that uncertainty over the impact of a policy instrument will make a policymaker less active. This result is challenged in a series of richer models designed to take into account the more complex reality faced by a macroprudential policymaker. We find that asymmetries in policy objectives, the presence of unquantifiable sources of risk, the ability to learn from policy, and private-sector uncertainty over policy objectives can all lead to more active policy.

JEL Codes: D81, E58.

 
Full article (PDF, 36 pages, 535 kb)
Appendix

Discussion by François Gourio