Are collateral-constraint models ready for macroprudential policy design?

We study the design of macroprudential policies based on quantitative collateral-constraint models. We show that the desirability of macroprudential policies critically depends on the specific form of collateral used in debt contracts: While inefficiencies arise when current prices affect collateral...

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Bibliographic Details
Published in:Journal of international economics 2022-11, Vol.139, p.103650, Article 103650
Main Authors: Ottonello, Pablo, Perez, Diego J., Varraso, Paolo
Format: Article
Language:English
Subjects:
Capital controls
Collateral constraints
Financial crises
Inefficient borrowing
Macroprudential policies
Sudden stops
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Summary:We study the design of macroprudential policies based on quantitative collateral-constraint models. We show that the desirability of macroprudential policies critically depends on the specific form of collateral used in debt contracts: While inefficiencies arise when current prices affect collateral—a frequent benchmark used to guide policies—they do not when only future prices affect collateral. Since the microfoundations and quantitative predictions of models with future-price collateral constraints do not appear less plausible than those using current prices, we conclude that additional empirical research on whether and how contract design is variant to policy is important for the use of these models in macroprudential policy design.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2022.103650