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Colombian house prices have increased significantly between 2005 and 2016. This paper estimates the extent of misalignments in house prices relative to fundamentals and evaluates the overall risk to the economy from the housing sector. The results suggest a moderate house price misalignment relative to fundamentals which is, however, mitigated by housing finance characteristics.

Infrastructure --- Macroeconomics --- Money and Monetary Policy --- Real Estate --- Industries: Financial Services --- Financial Markets and the Macroeconomy --- Urban, Rural, and Regional Economics: Housing Demand --- Housing Supply and Markets --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Economic Development: Urban, Rural, Regional, and Transportation Analysis --- Housing --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Aggregate Factor Income Distribution --- Property & real estate --- Finance --- Monetary economics --- Housing prices --- Credit --- Income --- Prices --- Financial institutions --- National accounts --- Money --- Saving and investment --- Colombia

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Debts, Public

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We consider how fear of model misspecification on the part of the planner and/or the households affects welfare gains from optimal macroprudential taxes in an economy with occasionally binding collateral constraints as in Bianchi (2011). On the one hand, there exist welfare gains from internalizing how borrowing decisions in good times affect the value of collateral during a crisis. On the other hand, interventions by a robust planner that has in mind a model far from the true underlying distribution of shocks, can result in negligible welfare gains, or even losses. This is because a policy that is robust to misspecification, as in Hansen and Sargent (2011), is optimal under a "worst-case'' scenario but not under alternative distributions of the state. A robust planner introduces taxes that are 5 percentage points higher but does not achieve a significant increase in welfare gains compared to a non-robust planner when the true underlying model is not the worst-case. If households also make choices that are robust to model misspecification, the gains are significantly reduced and a highly-robust planner "underborrows" and induces welfare losses. If, however, the worst-case scenario is indeed realized, then welfare gains are the largest possible.

Macroeconomics --- Economics: General --- International Economics --- Externalities --- Business Fluctuations --- Cycles --- Financial Markets and the Macroeconomy --- Fiscal Policy --- Current Account Adjustment --- Short-term Capital Movements --- Open Economy Macroeconomics --- Financial Crises --- Efficiency --- Optimal Taxation --- Economic & financial crises & disasters --- Economics of specific sectors --- Financial crises --- Economic sectors --- Currency crises --- Informal sector --- Economics

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We consider how fear of model misspecification on the part of the planner and/or the households affects welfare gains from optimal macroprudential taxes in an economy with occasionally binding collateral constraints as in Bianchi (2011). On the one hand, there exist welfare gains from internalizing how borrowing decisions in good times affect the value of collateral during a crisis. On the other hand, interventions by a robust planner that has in mind a model far from the true underlying distribution of shocks, can result in negligible welfare gains, or even losses. This is because a policy that is robust to misspecification, as in Hansen and Sargent (2011), is optimal under a "worst-case'' scenario but not under alternative distributions of the state. A robust planner introduces taxes that are 5 percentage points higher but does not achieve a significant increase in welfare gains compared to a non-robust planner when the true underlying model is not the worst-case. If households also make choices that are robust to model misspecification, the gains are significantly reduced and a highly-robust planner "underborrows" and induces welfare losses. If, however, the worst-case scenario is indeed realized, then welfare gains are the largest possible.

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We study gains from introducing a common numerical fiscal rule in a “Union” of model economies facing sovereign default risk. We show that among economies in the Union, there is significant disagreement about the common debt limit the Union should implement: the limit preferred by some economies can generate welfare losses in other economies. In contrast, a common sovereign spread limit results in higher welfare across economies in the Union.

Macroeconomics --- Economics: General --- Financial Risk Management --- International Lending and Debt Problems --- Open Economy Macroeconomics --- Fiscal Policy --- Debt --- Debt Management --- Sovereign Debt --- Price Level --- Inflation --- Deflation --- Economic & financial crises & disasters --- Economics of specific sectors --- Finance --- Fiscal rules --- Fiscal policy --- Debt limits --- Asset and liability management --- Asset prices --- Prices --- Currency crises --- Informal sector --- Economics