A Theory of Macroprudential Policies in the Presence of Nominal Rigidities
We propose a theory of monetary policy and macroprudential interventions in financial markets. We focus on economies with nominal rigidities in goods and labor markets and subject to constraints on monetary policy, such as the zero lower bound or fixed exchange rates. We identify an aggregate demand...
| Main Authors: | , , |
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| Format: | Article |
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The Econometric Society
2018
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| Online Access: | http://hdl.handle.net/1721.1/114273 https://orcid.org/0000-0003-2370-5575 |
| _version_ | 1811088052961935360 |
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| author | Werning, Iván Farhi, Emmanuel Werning, Ivan |
| author2 | Massachusetts Institute of Technology. Department of Economics |
| author_facet | Massachusetts Institute of Technology. Department of Economics Werning, Iván Farhi, Emmanuel Werning, Ivan |
| author_sort | Werning, Iván |
| collection | MIT |
| description | We propose a theory of monetary policy and macroprudential interventions in financial markets. We focus on economies with nominal rigidities in goods and labor markets and subject to constraints on monetary policy, such as the zero lower bound or fixed exchange rates. We identify an aggregate demand externality that can be corrected by macroprudential interventions in financial markets. Ex post, the distribution of wealth across agents affects aggregate demand and output. Ex ante, however, these effects are not internalized in private financial decisions. We provide a simple formula for the required financial interventions that depends on a small number of measurable sufficient statistics. We also characterize optimal monetary policy. We extend our framework to incorporate pecuniary externalities, providing a unified approach to both externalities. Finally, we provide a number of applications which illustrate the relevance of our theory. |
| first_indexed | 2024-09-23T13:55:31Z |
| format | Article |
| id | mit-1721.1/114273 |
| institution | Massachusetts Institute of Technology |
| last_indexed | 2024-09-23T13:55:31Z |
| publishDate | 2018 |
| publisher | The Econometric Society |
| record_format | dspace |
| spelling | mit-1721.1/1142732022-09-28T17:06:50Z A Theory of Macroprudential Policies in the Presence of Nominal Rigidities Werning, Iván Farhi, Emmanuel Werning, Ivan Massachusetts Institute of Technology. Department of Economics Farhi, Emmanuel Werning, Ivan We propose a theory of monetary policy and macroprudential interventions in financial markets. We focus on economies with nominal rigidities in goods and labor markets and subject to constraints on monetary policy, such as the zero lower bound or fixed exchange rates. We identify an aggregate demand externality that can be corrected by macroprudential interventions in financial markets. Ex post, the distribution of wealth across agents affects aggregate demand and output. Ex ante, however, these effects are not internalized in private financial decisions. We provide a simple formula for the required financial interventions that depends on a small number of measurable sufficient statistics. We also characterize optimal monetary policy. We extend our framework to incorporate pecuniary externalities, providing a unified approach to both externalities. Finally, we provide a number of applications which illustrate the relevance of our theory. 2018-03-23T18:58:15Z 2018-03-23T18:58:15Z 2015-06 2015-05 2018-03-01T18:40:58Z Article http://purl.org/eprint/type/JournalArticle 0012-9682 http://hdl.handle.net/1721.1/114273 Farhi, Emmanuel, and Iván Werning. “A Theory of Macroprudential Policies in the Presence of Nominal Rigidities.” Econometrica 84, no. 5 (2016): 1645–1704. https://orcid.org/0000-0003-2370-5575 http://dx.doi.org/10.3982/ECTA11883 Econometrica Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf The Econometric Society NBER |
| spellingShingle | Werning, Iván Farhi, Emmanuel Werning, Ivan A Theory of Macroprudential Policies in the Presence of Nominal Rigidities |
| title | A Theory of Macroprudential Policies in the Presence of Nominal Rigidities |
| title_full | A Theory of Macroprudential Policies in the Presence of Nominal Rigidities |
| title_fullStr | A Theory of Macroprudential Policies in the Presence of Nominal Rigidities |
| title_full_unstemmed | A Theory of Macroprudential Policies in the Presence of Nominal Rigidities |
| title_short | A Theory of Macroprudential Policies in the Presence of Nominal Rigidities |
| title_sort | theory of macroprudential policies in the presence of nominal rigidities |
| url | http://hdl.handle.net/1721.1/114273 https://orcid.org/0000-0003-2370-5575 |
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