Macroprudential Policy, Differences in Beliefs and Growth

I propose a model of macroprudential policy interventions in financial markets. I solve a heterogeneous-agent asset pricing model and show that speculation caused by differences in beliefs about expected technology growth increases asset returns volatility and the equity risk premium, reduces aggregate output and makes individual consumption growth and leisure more volatile. Macroprudential policy helps to offset the distortions caused by speculation, reducing the asset return volatility and the equity risk premium. It also mitigates output distortion and smooths consumption and leisure. Therefore, under every possible reasonable probability measure specified by the belief-neutral welfare criteria proposed by Brunnermeier, Simsek, and Xiong (2014), macroprudential policy raises social welfare.