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