Macroeconomics Seminar - Gadi Barlevy (Chicago FED)

Room 315, Level 3, FBE Building, 111 Barry Street, Carlton

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Faisal Sohail

faisal.sohail@unimelb.edu.au

T: +61 3 9035 8139

Title: 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.