Asset price booms and macroeconomic policy: A risk-shifting approach

Abstract

This paper uses a risk-shifting model to analyze policy responses to asset price booms. We show risk-shifting leads to inefficient asset and credit booms in which asset prices can exceed fundamentals.  However, the inefficiencies associated with risk-shifting arise independently of whether the asset is a bubble. Given evidence of risk-shifting, then, policymakers may not need to determine if assets are bubbles to justify intervention. We then show that some of the main candidate interventions against asset booms have ambiguous welfare implications: Tighter monetary policy can exacerbate some inefficiencies but mitigates others, while leverage restrictions can raise asset prices and lead to more excessive leverage. Policy responses are more effective when they disproportionately discourage riskier investments.

About the presenter’s visit

Gadi Barlevy will be visiting the School of Economics on Friday 28 February 2020.  While here he will be using room 520A Colin Clark Building.  If you would like to meet with him please contact Dr Jorge Miranda Pinto who will be his host while at The University of Queensland.  Dr Jorge Miranda Pinto can be contacted on j.mirandapinto@uq.edu.au.