https://macropaperwarehouse.com/jel_codes/d6/D6Hugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/a-theory-of-macroprudential-policies-in-the-presence-of-nominal-rigidities/https://macropaperwarehouse.com/papers/a-theory-of-macroprudential-policies-in-the-presence-of-nominal-rigidities/<p>This is a theory paper, with no calibration or empirical estimates: its output is a set of analytical formulas rather than numbers. It asks what justifies macroprudential intervention in financial markets, and answers that nominal rigidities alone &ndash; without the incomplete markets or price-dependent borrowing constraints that earlier work relied on &ndash; are enough. In the baseline model financial markets are complete and frictionless; the only imperfections are sticky goods and labor prices and, in the cases the authors care most about, a constraint that stops monetary policy from undoing them, such as the zero lower bound or a fixed exchange rate. The mechanism is what the authors call an aggregate demand externality: once a state of the world is realised, who holds the wealth matters for how much the economy spends, because agents differ in their marginal propensities to spend, but no atomistic agent takes that macroeconomic consequence into account when choosing a portfolio ex ante. Two sets of results follow. First, using a perturbation argument in the spirit of Geanakoplos and Polemarchakis (1985), any equilibrium that is not first best can be improved by intervening in financial markets &ldquo;except in non-generic knife-edged cases&rdquo; &ndash; the constrained-inefficiency claim is a genericity claim, not a claim that intervention always helps. Second, optimal monetary and macroprudential policy are characterised jointly by explicit formulas in three sufficient statistics: elasticities of substitution, marginal propensities to spend, and good-specific wedges. The optimal financial tax on an agent&rsquo;s claim in a given state is the marginal-propensity-weighted sum of that state&rsquo;s wedges, so wealth should be tilted toward states where the goods an agent buys heavily are depressed. Monetary policy, in parallel, targets weighted averages of wedges, adapting the standard New Keynesian targeting rules. The framework is then extended to include pecuniary externalities as well, and &ndash; a result the authors call remarkable &ndash; the macroprudential formula is literally unchanged: market incompleteness and price-dependent constraints alter the wedges but not the mapping from wedges to taxes. Four applications illustrate the theory: household deleveraging into a liquidity trap, where the optimal policy mix restricts pre-crisis borrowing (in practice a loan-to-value or debt-to-income limit) while monetary policy still delivers perfect stabilisation during the boom; capital controls under a fixed exchange rate, read as a second-best way of regaining interest-rate autonomy; and two cases with a flexible exchange rate where capital controls are still warranted, one with terms-of-trade-dependent collateral constraints and one with non-contingent local- and foreign-currency debt.</p>