Concerted Efforts? Monetary Policy and Macro-Prudential Tools

Transcription

1 Concerted Efforts? Monetary Policy and Macro-Prudential Tools Andrea Ferrero Richard Harrison Benjamin Nelson University of Oxford Bank of England Centre for Macroeconomics 2 nd Annual European Central Bank Macroprudential Policy and Research Conference Frankfurt, 11 May 2017 The views expressed in this paper do not necessarily reflect the position of the Bank of England.

2 Boom-Bust Cycle in House Prices and Debt 140 US FHFA Real House Prices (left) US Mortgage Debt (right) Index = 100 in 2000:Q % of GDP Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

3 A New Normal? With the recovery in the UK economy broadening and gaining momentum in recent months, the Bank of England is now focussed on turning that recovery into a durable expansion. To do so, our policy tools must be used in concert. Mark Carney Financial Stability Report Press Conference 26 June 2014 Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

4 A New Normal? With the recovery in the UK economy broadening and gaining momentum in recent months, the Bank of England is now focussed on turning that recovery into a durable expansion. To do so, our policy tools must be used in concert. Mark Carney Financial Stability Report Press Conference 26 June 2014 New era of central banking Monetary policy: Interest rate setting Financial stability: Macro-prudential tools Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

5 What We Do Simple framework to study interaction of monetary and macro-pru policies Introduce nominal rigidities in Justiniano, Primiceri and Tambalotti (2016) Explicit role of financial intermediation (Curdia and Woordford, 2017) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

6 What We Do Simple framework to study interaction of monetary and macro-pru policies Introduce nominal rigidities in Justiniano, Primiceri and Tambalotti (2016) Explicit role of financial intermediation (Curdia and Woordford, 2017) Normative analysis Joint optimal policy plan (some analytics) Boom-bust scenario (numerical analysis) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

7 What We Do Simple framework to study interaction of monetary and macro-pru policies Introduce nominal rigidities in Justiniano, Primiceri and Tambalotti (2016) Explicit role of financial intermediation (Curdia and Woordford, 2017) Normative analysis Joint optimal policy plan (some analytics) Boom-bust scenario (numerical analysis) Focus on implications of macro-pru for monetary policy Pervasive spillovers between monetary policy and macro-prudential regulation Macro-pru facilitates debt-deleveraging process and alleviates ZLB constraint Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

8 Selected Related Literature Coordinated monetary and macro-prudential policies Angelini, Neri and Panetta (2012), Angeloni and Faia (2013), Bean et al. (2010), De Paoli and Paustian (2013) Bank capital requirements and monetary policy Christiano and Ikeda (2016), Clerc et al. (2015), Gertler, Kiyotaki and Queralto (2012), Van den Heuvel (2016) ZLB constraint, deleveraging, and macro-prudential policy Eggertsson and Krugman (2012), Farhi and Werning (2016), Guerrieri and Lorenzoni (2015), Korinek and Simsek (2016) Empirical studies Akinci and Olmstead-Rumsey (2017), Cerutti, Claessens and Laeven (2015), Gambacorta and Murcia (2016), Meeks (2017) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

9 Outline 1 Model and credit market equilibrium 2 Optimal policy: Analytical results 3 Quantitative experiments: Boom-bust scenario Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

10 Overview Patient and impatient households, differ in their individual discount factor Impatient households would like to borrow to purchase housing services Patient household save via deposits and equity of financial intermediaries Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

11 Overview Patient and impatient households, differ in their individual discount factor Impatient households would like to borrow to purchase housing services Patient household save via deposits and equity of financial intermediaries Financial intermediaries channel funds from savers to borrowers Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

12 Overview Patient and impatient households, differ in their individual discount factor Impatient households would like to borrow to purchase housing services Patient household save via deposits and equity of financial intermediaries Financial intermediaries channel funds from savers to borrowers Financial frictions Collateral constraint on impatient households (Kiyotaki and Moore, 1997) Capital requirement on financial intermediaries (He and Krishnamurty, 2013) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

13 Overview Patient and impatient households, differ in their individual discount factor Impatient households would like to borrow to purchase housing services Patient household save via deposits and equity of financial intermediaries Financial intermediaries channel funds from savers to borrowers Financial frictions Collateral constraint on impatient households (Kiyotaki and Moore, 1997) Capital requirement on financial intermediaries (He and Krishnamurty, 2013) Standard New Keynesian supply side with nominal rigidities Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

14 Impatient Households (Borrowers) Continuum of measure ξ (0, 1), maximize { [ ]} ( ) E 0 β t b 1 e zcb t + χb H (Ht b ) 1 σ h χb L 1 σ t=0 h 1 + ϕ (Lb t ) 1+ϕ Budget constraint P t C b t D b t + Q t H b t = W b t L b t R b t 1 Db t 1 + Q th b t 1 + Ωb t T b t, Collateral constraint (Kiyotaki and Moore, 1997) with Θ t (0, 1) D b t Θ t Q t H b t Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

15 Patient Households (Savers) Continuum of measure 1 ξ, maximize E 0 { t=0 β t s with β s (β b, 1) Budget constraint [ ( ) ] } 1 e zcs t + χs H (H s 1 σ t) 1 σ h χs L h 1 + ϕ (Ls t) 1+ϕ P t C s t + D s t + E s t + Γ(E s t) + (1 + τ h )Q t H s t = W s t L s t + R d t 1 Ds t 1 + Re t 1 Es t 1 + Q th s t 1 Ts t + Ω s t, where Γ(E s t ) is equity adjustment cost (Jermann and Quadrini, 2012) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

16 Financial Intermediaries Balance sheet at time t (after borrowers and lenders decisions) Assets Liabilities Loans D b t Deposits D s t Equity E s t Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

17 Financial Intermediaries Balance sheet at time t (after borrowers and lenders decisions) Assets Liabilities Loans D b t Deposits D s t Equity E s t Leverage constraint/capital requirement (He and Krishnamurthy, 2013) E s t κ t D b t Always binding in equilibrium for banks to be relevant Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

18 Financial Intermediaries Balance sheet at time t (after borrowers and lenders decisions) Assets Liabilities Loans D b t Deposits D s t Equity E s t Leverage constraint/capital requirement (He and Krishnamurthy, 2013) E s t κ t D b t Always binding in equilibrium for banks to be relevant Zero profit condition R b t = κ t R e t + (1 κ t )R d t Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

19 Supply Standard New Keynesian supply side Retailers package differentiated intermediate goods with CES technology Intermediate goods produced with technology linear in labor Y t (f ) = A t L t (f ) Labor aggregate L t (f ) [L b t (f )] ξ [L s t(f )] 1 ξ Corresponding wage index W t (W b t ) ξ (W s t ) 1 ξ Staggered price setting (Calvo, 1983) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

20 Equilibrium Goods market Y t = ξc b t + (1 ξ)c s t + Γ t Housing market H = ξh b t + (1 ξ)h s t Aggregate balance sheet of financial sector ξd b t = (1 ξ)(d s t + E s t) Evolution of per-capita real private debt D b t P t = Rb t 1 Π t D b t 1 P t 1 + C b t Y t + Q t P t (H b t H b t 1 ) + T b, Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

21 Credit Market Equilibrium Underlying credit market equilibrium corresponds to JPT Sequence of static equilibria that can be represented in (d b, R b ) space Location of equilibrium depends on parameter values (not multiple equilibria) R b Credit Supply A 1/β b B Credit Demand 1/β s Non-Binding Borrowing Constraint Binding Borrowing Constraint d b Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

22 Macro-Pru Tools and Credit Market Equilibrium Tightening of LTV ratios: Θ t R b Credit Supply 1/β b B Credit Demand B 1/β s Θê Non-Binding Borrowing Constraint Binding Borrowing Constraint d b Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

23 Macro-Pru Tools and Credit Market Equilibrium Tightening of capital requirements: κ t R b Credit Supply κé 1/β b B B Credit Demand 1/β s Non-Binding Borrowing Constraint Binding Borrowing Constraint d b Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

24 Outline 1 Credit market equilibrium 2 Interaction between monetary and macro-prudential policy 3 Quantitative experiments Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

25 LQ Approximation Loss function L 0 σ + ϕ [ E 0 2 β t x 2 t + λ π πt 2 + λ κ κt 2 + λ c (c b t c s t) 2 + λ h (h b t h s t) 2] t=0 Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

26 LQ Approximation Loss function L 0 σ + ϕ [ E 0 2 β t x 2 t + λ π πt 2 + λ κ κt 2 + λ c (c b t c s t) 2 + λ h (h b t h s t) 2] t=0 Standard terms in inflation and (efficient) output gap Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

27 LQ Approximation Loss function L 0 σ + ϕ [ E 0 2 β t x 2 t + λ π πt 2 + λ κ κt 2 + λ c (c b t c s t) 2 + λ h (h b t h s t) 2] t=0 Standard terms in inflation and (efficient) output gap Terms due to financial frictions Lack of risk-sharing Equity adjustment costs Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

28 LQ Approximation Loss function L 0 σ + ϕ [ E 0 2 β t x 2 t + λ π πt 2 + λ κ κt 2 + λ c (c b t c s t) 2 + λ h (h b t h s t) 2] t=0 Standard terms in inflation and (efficient) output gap Terms due to financial frictions Lack of risk-sharing Equity adjustment costs Standard NK Phillips curve π t = γx t + βe t π t+1 + u m t, Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

29 LQ Approximation IS curve (Savers Euler equation) x t ξ(c b t c s t) = σ 1 (i t E t π t+1 ) + E t [x t+1 ξ(c b t+1 cs t+1 )] + νcgap t Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

30 LQ Approximation IS curve (Savers Euler equation) x t ξ(c b t c s t) = σ 1 (i t E t π t+1 ) + E t [x t+1 ξ(c b t+1 cs t+1 )] + νcgap t Binding borrowing constraint d b t = θ t + q t + (1 ξ)(h b t h s t) Evolution of debt d b t = 1 β s (i t 1 + ψκ t 1 + d b t 1 π t) + (1 ξ)[(h b t h s t) (h b t 1 hs t 1 )] + 1 ξ η (cb t c s t) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

31 LQ Approximation House prices q t = (i t E t π t+1 ) + σω ω + β E tx t+1 + ξ µ ω + β θ ξ(1 µ) t ω + β ψκ t + β ω + β E tq t+1 + ν h t Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

32 LQ Approximation House prices q t = (i t E t π t+1 ) + σω ω + β E tx t+1 + ξ µ ω + β θ ξ(1 µ) t ω + β ψκ t + β ω + β E tq t+1 + ν h t Housing gap h b t h s t = ω ξ(β s β b ) (i t E t π σ h ξω t+1 ) + β s β b σ h ω (q t E t q t+1 ) σ σ h ξ (x t E t x t+1 ) + σ (c b t c s σ t) + µ h σ h ω θ t 1 µ σ h ω ψκ t + ν hgap t Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

33 Optimal Macro-Prudential Policy with Flex Prices Suppose prices are flexible and no mark-up shocks Also abstract from costs of changing capital requirements (λκ = 0) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

34 Optimal Macro-Prudential Policy with Flex Prices Suppose prices are flexible and no mark-up shocks Also abstract from costs of changing capital requirements (λκ = 0) Macro-prudential authority can fully stabilize housing and consumption gap Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

35 Optimal Macro-Prudential Policy with Flex Prices Suppose prices are flexible and no mark-up shocks Also abstract from costs of changing capital requirements (λκ = 0) Macro-prudential authority can fully stabilize housing and consumption gap Can monetary policy fully stabilize inflation? NO! Only in expectations: Optimal monetary policy rule is Et π t+1 = 0 Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

36 Optimal Macro-Prudential Policy with Flex Prices Suppose prices are flexible and no mark-up shocks Also abstract from costs of changing capital requirements (λκ = 0) Macro-prudential authority can fully stabilize housing and consumption gap Can monetary policy fully stabilize inflation? NO! Only in expectations: Optimal monetary policy rule is Et π t+1 = 0 Intuition: Inflation surprises make private debt state-contingent d b t = 1 [ ] 1 β s 1 µ db t 1 (π t E t 1 π t ) + νt b Similar to interaction of monetary and fiscal policy (Chari et al., 1991) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

37 Optimal Macro-Prudential Policy with Flex Prices Suppose prices are flexible and no mark-up shocks Allow for costs of changing capital requirements (λκ > 0) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

38 Optimal Macro-Prudential Policy with Flex Prices Suppose prices are flexible and no mark-up shocks Allow for costs of changing capital requirements (λκ > 0) Still optimal to use ex-post inflation surprises to stabilize private debt Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

39 Optimal Macro-Prudential Policy with Flex Prices Suppose prices are flexible and no mark-up shocks Allow for costs of changing capital requirements (λκ > 0) Still optimal to use ex-post inflation surprises to stabilize private debt Stabilization tradeoff between housing and consumption gap Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

40 Optimal Macro-Prudential Policy with Flex Prices Suppose prices are flexible and no mark-up shocks Allow for costs of changing capital requirements (λκ > 0) Still optimal to use ex-post inflation surprises to stabilize private debt Stabilization tradeoff between housing and consumption gap Optimal targeting rules for macro-prudential policy λ κ κ t = ϕ κ λ h (h b t h s t) λ c (c b t c s t) = ϕ h λ h (h b t h s t) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

41 Optimal Macro-Prudential Policy with Sticky Prices With sticky prices, inflation volatility highly suboptimal (Siu, 2004) Optimal targeting rule for monetary policy x t + γλ π π t + σ ψ λ κκ t M κt = 0 where macro-prudential policy gap is M κt η 1 ξ [ ξσ λ κ ψ κ t λ c (c b t c s t) ξα h λ h (h b t h s t) ] Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

42 Optimal Macro-Prudential Policy with Sticky Prices With sticky prices, inflation volatility highly suboptimal (Siu, 2004) Optimal targeting rule for monetary policy x t + γλ π π t + σ ψ λ κκ t M κt = 0 where macro-prudential policy gap is M κt η 1 ξ [ ξσ λ κ ψ κ t λ c (c b t c s t) ξα h λ h (h b t h s t) Optimal targeting rules for macro-prudential policy η 1 ξ ζ hλ h (h b t h s t) = λ κ ψ κ t + M κt M κt = µζ h σ h ω λ h(h b t h s t) + βe t M κt+1 Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34 ]

43 Optimal Monetary and Macro-Prudential Policies Pervasive spillovers between monetary and macro-prudential policies Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

44 Optimal Monetary and Macro-Prudential Policies Pervasive spillovers between monetary and macro-prudential policies With flexible prices, ex-post inflation surprises stabilize private debt Macro-prudential policy focuses on consumption and housing gaps Full stabilization if varying capital requirements is not costly Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

45 Optimal Monetary and Macro-Prudential Policies Pervasive spillovers between monetary and macro-prudential policies With flexible prices, ex-post inflation surprises stabilize private debt Macro-prudential policy focuses on consumption and housing gaps Full stabilization if varying capital requirements is not costly With sticky prices, ex-post inflation volatility too costly Inflation targeting affected by macro-prudential policy gap Macro-prudential policy gap Depends on current and future housing gaps Prevents static targeting of risk-sharing objectives Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

46 Outline 1 Credit market equilibrium 2 Interaction between monetary and macro-prudential policy 3 Quantitative experiments Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

47 Calibration Parameter Description Value β s Savers discount factor β b Borrowers discount factor σ IES (consumption) 1 ϕ Inverse Frisch elasticity 1 γ d Debt limit inertia 0.7 γ Slope of Phillips curve ξ Fraction of borrowers in economy 0.57 η Debt/GDP ratio 1.8 Θ LTV ratio 0.7 ψ Elasticity of funding cost to capital ratio σ h IES (housing) 5 ρ h Housing demand shock persistence 0.95 Introduce slow-moving debt to capture corr(hp, d b ) < 1 D b t (i) γ d D b t 1 (i) + (1 γ d) Θ t Q t H b t (i) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

48 Calibration Parameter Description Value β s Savers discount factor β b Borrowers discount factor σ IES (consumption) 1 ϕ Inverse Frisch elasticity 1 γ d Debt limit inertia 0.7 γ Slope of Phillips curve ξ Fraction of borrowers in economy 0.57 η Debt/GDP ratio 1.8 Θ LTV ratio 0.7 ψ Elasticity of funding cost to capital ratio σ h IES (housing) 5 ρ h Housing demand shock persistence 0.95 Introduce slow-moving debt to capture corr(hp, d b ) < 1 D b t (i) γ d D b t 1 (i) + (1 γ d) Θ t Q t H b t (i) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

49 Experiment Generate boom-bust scenario for house prices Similar to US experience (more extreme than UK) Want to negative shock large enough so that interest rate hits ZLB Scenario generated via news shock E t u h K > E t 1 u h K t = 1,... K 1 u h K < E 1 u h K 2.5 (a) Expected house price shock 50 (b) Real house price expectations Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

50 Flexible Inflation Targeting Suppose policymaker seeks to minimize L FIT ( ) t E t β i x 2 t+i + λ ππt+i 2 i=0 No macro-prudential objective (pre-crisis status quo) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

51 Flexible Inflation Targeting Suppose policymaker seeks to minimize L FIT ( ) t E t β i x 2 t+i + λ ππt+i 2 i=0 No macro-prudential objective (pre-crisis status quo) Assume policymaker operates under discretion Hard to hit ZLB under commitment Without ZLB, optimal targeting rule is x t + λ π γπ t = 0 Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

52 Flexible Inflation Targeting Real house price Debt Multiplier on borrowing constraint Output gap, per cent Quarterly inflation, per cent 4 2 Nominal policy rate Consumption gap, per cent Housing gap, per cent No bounds applied Bounds applied Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

53 Flexible Inflation Targeting and Macro-Prudential Policy Macro-prudential authority also operates under discretion, minimizes L MP [ ] 0 = E 0 β t λ c (c b t c s t) 2 + λ h (h b t h s t) 2 + λ κ κt 2 t=0 Focus on use of LTV instrument Also study incremental contribution of capital requirements Monetary policy continues to operate under flexible inflation targeting Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

54 Flexible Inflation Targeting and Macro-Prudential Policy Real house price Output gap, per cent Debt Quarterly inflation, per cent Multiplier on borrowing constraint Nominal policy rate Consumption gap, per cent Housing gap, per cent Loan to value ratio, per cent Lending rate Monetary policy Monetary policy plus LTV & bank capital Monetary policy plus LTV Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

55 Macro-Prudential Policy after the Crash Real house price Debt Multiplier on borrowing constraint Output gap, per cent Quarterly inflation, per cent Nominal policy rate Consumption gap, per cent Housing gap, per cent Loan to value ratio, per cent Lending rate Monetary policy Monetary policy plus post crash LTV Monetary policy plus delayed post crash LTV Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

56 Conclusions Financial crisis extended objectives and toolkit of central banks Macro-Prudential policy: LTV ratios and capital requirements This paper has focused on implications of macro-pru for monetary policy Illustrated how inflation targeting affected by macro-prudential policy targets Macro-prudential policy especially useful to escape ZLB situations But must be used very aggressively In directions that may encourage economy to undertake even more debt May conflict with financial stability objective outside scope of this paper Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

57 Robustness: Endogenous Spreads Credit spreads exogenous in our model May affect macro-pru policy that encourages more borrowing in a slump When spreads are likely to rise, hence deterring additional borrowing Replace banking system with framework in Gertler and Kiyotaki (2010) Moral hazard = Endogenous spreads Nelson and Pinter (2013) show steady state is unchanged Compare using same loss function Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

58 Comparison with Nelson and Pinter (2017) Demand shock Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

59 Comparison with Nelson and Pinter (2017) Housing demand shock Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

60 Comparison with Nelson and Pinter (2017) LTV shock Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

61 Comparison with Nelson and Pinter (2017) TFP shock Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

62 Methodology Occasionally-binding constraints Use methodology of Holden and Paetz (2012) Similar to Guerrieri and Iacoviello (2015) Treats occasionally-binding constraints as a regime Takes into accounts possibility that constraint does not bing at t + 1 conditional on constraint binding at t (and vice versa) Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34

63 Methodology Occasionally-binding constraints Use methodology of Holden and Paetz (2012) Similar to Guerrieri and Iacoviello (2015) Treats occasionally-binding constraints as a regime Takes into accounts possibility that constraint does not bing at t + 1 conditional on constraint binding at t (and vice versa) Doesn t account for risk that future shocks may cause constraint to bind Linear approximation within each regime Overall piece-wise linear solution Neither precautionary savings nor skewness but highly tractable Ferrero, Harrison & Nelson (Oxford, BoE, CfM) Concerted Efforts? 11 May / 34