BIS paper offers method of overcoming time inconsistency in macro-prudential policies


A state-contingent macro-prudential debt tax can solve time inconsistency problems and significantly lower the chances of a financial crisis, according to a working paper published by the Bank for International Settlements (BIS) on October 6.

In Optimal Time-Consistent Macroprudential Policy, authors Javier Bianchi and Enrique Mendoza use a dynamic stochastic general equilibrium model to analyse a situation where private agents fail to fully account for the risk of crashes when making their

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