Calibrating Macroprudential Policies for the Canadian Mortgage Market

The views expressed herein are those of the authors and do not necessarily represent those of the C. D. Howe Institute, the Federal Reserve Banks of Chicago and San Francisco or the Board of Governors of the Federal Reserve System. [...] The model provides an answer to the Canadian Context the question of whether the probability of entering and staying in a low financial stability state is high Roles and Responsibilities enough to go ahead with the policy, given the cost The first thing to understand about the Canadian of implementation. [...] If the policy is put in place prior to tw at a cost of C, the utility flow declines to u, such that ū > u > 0. In addition, the policy itself is designed to lower the incidence of the adverse event as follows, that is, the probability of a crisis declines after the policy is implemented at time t1. [...] The θ parameter is a measure of the perceived effectiveness of the policy and is bounded within the closed unit interval such that a fully effective policy is characterized by θ = 1, while a completely ineffective policy coincides with θ = 0. The policymaker’s optimal decision is to balance the cost of enacting the policy with the benefit of waiting as long as possible before doing so. [...] The value of the discount rate r should be both a function of the time horizon over which the policy decision is being made and the overall riskiness of the policy action.