Macroprudential policy under uncertainty

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 29 January 2016

Working Paper No. 584
By Saleem Bahaj and Angus Foulis

We argue that the uncertainty over the impact of macroprudential policy need not make a policymaker more cautious. Our starting point is the classic result of Brainard (1967) which finds 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 the presence of unquantifiable sources of risk, potential asymmetries in policy objectives, the ability to learn from policy actions, and private sector uncertainty over policy objectives can all lead to more active policy in the face of uncertainty.

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