BIS paper models optimal response to unconventional shocks
Authors find ‘significant variation’ in optimal policy reactions to shock events
News shocks and regime switches in global liquidity appear to be two factors acting as amplification mechanisms for financial crises, but macro-prudential policies can reduce the damage, according to a working paper published on July 30 by the Bank for International Settlements (BIS).
Authors Javier Bianchi and Enrique Mendoza use a two-sector model to examine how news shocks about future fundamentals and regime switches in global liquidity can be controlled using a state-contingent tax on debt
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