02387cas a2200265 a 4500 AALejournalIMF011980 230101c9999 xx r poo 0 0eng d 5.00 USD 9781475505290 1018-5941 BD-DhAAL BD-DhAAL Bianchi, Javier. Macro-prudential Policy in a Fisherian Model of Financial Innovation / Javier Bianchi, Emine Boz, Enrique Mendoza. Washington, D.C. : International Monetary Fund, 2012. 1 online resource (54 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students The interaction between credit frictions, financial innovation, and a switch from optimistic to pessimistic beliefs played a central role in the 2008 financial crisis. This paper develops a quantitative general equilibrium framework in which this interaction drives the financial amplification mechanism to study the effects of macro-prudential policy. Financial innovation enhances the ability of agents to collateralize assets into debt, but the riskiness of this new regime can only be learned over time. Beliefs about transition probabilities across states with high and low ability to borrow change as agents learn from observed realizations of financial conditions. At the same time, the collateral constraint introduces a pecuniary externality, because agents fail to internalize the effect of their borrowing decisions on asset prices. Quantitative analysis shows that the effectiveness of macro-prudential policy in this environment depends on the government's information set, the tightness of credit constraints and the pace at which optimism surges in the early stages of financial innovation. The policy is least effective when the government is as uninformed as private agents, credit constraints are tight, and optimism builds quickly. Mode of access: Internet Boz, Emine. Mendoza, Enrique. IMF Working Papers; Working Paper ; No. 2012/181 Full text available on IMF http://elibrary.imf.org/view/journals/001/2012/181/001.2012.issue-181-en.xml IMF e-Library