Optimal Policy for Macrofinancial Stabilityt

There is a new and now large literature analyzing government poli-cies for financial stability based on models with endogenous borrow-ing constraints. These normative analyses build upon the concept of constrained efficient allocation where the social planner is con-strained by the same borrowing limit that agents face. In this paper, we show that there exists at least one set of tools implementing the constrained efficient allocation that can also be used by a Ramsey planner to replicate an unconstrained allocation, achieving higher welfare. Constrained efficiency may lead to inaccurate character-izations of welfare maximizing policies relative to Ramsey optimal policy. (JEL E32, E44, E61, G01, H21)