Macroprudential Capital Controls and the Shadow Economy

How does the optimal design of macroprudential capital controls depend on the ability of some agents to circumvent regulation? To address this question, we study the interaction between a regulated and an unregulated sphere in a model economy where pecuniary externalities calls for ex-ante policy interventions. Unregulated agents respond to macroprudential policy by increasing their leverage, and the planner weights this spillover effect when deciding about the optimal extent of intervention on regulated agents.