Macroprudential Policy Under Uncertainty

63 Pages Posted: 2 Feb 2016

Date Written: January 29, 2016

Abstract

We argue that the uncertainty over the impact of macroprudential policy need not make a policymaker more cautious. Our starting point is the classic result of Brainard (1967) which finds 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 the presence of unquantifiable sources of risk, potential asymmetries in policy objectives, the ability to learn from policy actions, and private sector uncertainty over policy objectives can all lead to more active policy in the face of uncertainty.

Keywords: Macroprudential policy, robust control, Linex, uncertainty

JEL Classification: D81, E58

Suggested Citation

Bahaj, Saleem and Foulis, Angus, Macroprudential Policy Under Uncertainty (January 29, 2016). Bank of England Working Paper No. 584, Available at SSRN: https://ssrn.com/abstract=2726526 or http://dx.doi.org/10.2139/ssrn.2726526

Saleem Bahaj (Contact Author)

UCL Economics ( email )

30 Gordon Street
London, England WC1H 0AX
United Kingdom

Angus Foulis

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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