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สถาบันวิจัยเศรษฐกิจป๋วย อึ๊งภากรณ์
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23 March 2016
20161458691200000
No. 022

Macroprudential Policy in a Bubble-Creation Economy

Pongsak LuangaramAthakrit Thepmongkol

Abstract

This paper analyzes macroprudential policy in the form of loan-to-value (LTV) restriction in a bubble-creation economy of Martin and Ventura (forth- coming). We find that implementation of LTV policy may generate multiple equilibria. Moreover, its effectiveness in terms of investment and size of bubbles depends on the degree of financial friction. In high-capital steady state, low (high) financial friction implies that bubbles originally crowd out (in) investment, so that implementation of LTV policy causes bubbles to decrease (remain unchanged) and enhances (reduces) investment. However, in low-capital equilibrium, the policy has ambiguous effects. LTV policy may help to lower the possibility of sunspot equilibria in two aspects: (1) by destabilizing the low-capital steady state and (2) by confining the set of consistent market sentiments in the presence of high financial friction.

Pongsak Luangaram
Pongsak Luangaram
Chulalongkorn University
Athakrit Thepmongkol
Athakrit Thepmongkol
National Institute of Development Administration
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JEL: E44F41G12
Tags: rational bubblesbubble creationmacroprudential policyloan-to-value ratiooverlapping generations modelfinancial friction
The views expressed in this workshop do not necessarily reflect the views of the Puey Ungphakorn Institute for Economic Research or the Bank of Thailand.
Pongsak Luangaram
Pongsak Luangaram
Chulalongkorn University
Athakrit Thepmongkol
Athakrit Thepmongkol
National Institute of Development Administration

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