Are Collateral-Constraint Models Ready for Macroprudential Policy Design?

Produced by: 
National Bureau of Economic Research
Available from: 
September 2021
Paper author(s): 
Pablo Ottonello
Diego J. Perez
Paolo Varraso
Topic: 
Macroeconomics - Economic growth - Monetary Policy
Year: 
2021

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 work is essential for the use of these models in macroprudential policy design.

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