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Hoarding international reserves versus a Pigovian tax-cum-subsidy scheme: Reflections on the deleveraging crisis of 2008-2009, and a cost benefit analysis

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  • Aizenman, Joshua

Abstract

We outline the case for supporting self-insurance by imposing a tax on external borrowing in a model of an emerging market. Entrepreneurs finance tangible investments via bank intermediation of foreign borrowing, exposing the economy to negative fire-sale externalities at times of deleveraging; a risk that increases with the ratio of aggregate external borrowing to international reserves. Price taking economic agents ignore their marginal impact on the expected cost of a deleveraging crisis. The optimal borrowing tax reduces the distorted activity, external borrowing, and induces borrowers to co-finance the precautionary hoarding of international reserves.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 9 (September)
Pages: 1502-1513

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:9:p:1502-1513

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Fire-sale congestion externality Deleveraging Tax-cum-subsidy International reserves;

References

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  1. Dani Rodrik, 2006. "The social cost of foreign exchange reserves," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 253-266.
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  9. Aizenman, Joshua & Pasricha, Gurnain, 2009. "Selective Swap Arrangements and the Global Financial Crisis: Analysis and Interpretation," Santa Cruz Department of Economics, Working Paper Series qt2vw7s14s, Department of Economics, UC Santa Cruz.
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  16. Joshua Aizenman & Yi Sun, 2009. "The Financial Crisis and Sizable International Reserves Depletion: From 'Fear of Floating' to the 'Fear of Losing International Reserves'?," Working Papers 382009, Hong Kong Institute for Monetary Research.
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Citations

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Cited by:
  1. Jeanne, Olivier, 2013. "Macroprudential policies in a global perspective," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-38.
  2. Gondo, Rocío, 2014. "State Contingent Assets, Financial Crises and Pecuniary Externalities in Models with Collateral Constraints," Working Papers 2014-001, Banco Central de Reserva del Perú.
  3. Yannick Kalantzis & Kenza Benhima & Philippe Bacchetta, 2012. "Capital Controls with International Reserve Accumulation: Can this Be Optimal?," 2012 Meeting Papers 448, Society for Economic Dynamics.

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