The School of Economics invites you to a School seminar presented by Gadi Barlevy (Chicago Federal Reserve Bank).

Asset Price Booms and Macroeconomic
Policy: a Risk-Shifting Approach

Co-authors: 

Franklin Allen (Imperial College London) and Douglas Gale (New York University)

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.