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Robust policymaking in the face of sudden stops

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  • Young, Eric R.

Abstract

This paper considers tax policies to deal with Sudden Stops – declines in aggregate activity that are magnified by a binding collateral constraint – that occasionally occur in emerging market economies. Households and/or the government are assumed to face model uncertainty and desire robustness against alternative models. Welfare gains from optimal taxation are small if the government trusts its model of household expectations, whether those expectations are altered by model uncertainty or not; in contrast, welfare losses are large if the government is uncertain about the household's probability model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 5 ()
Pages: 512-527

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Handle: RePEc:eee:moneco:v:59:y:2012:i:5:p:512-527

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  12. Dennis, Richard, 2010. "How robustness can lower the cost of discretion," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 653-667, September.
  13. Yulei Luo & Jun Nie & Eric R. Young, 2012. "Model uncertainty and intertemporal tax smoothing," Research Working Paper RWP 12-01, Federal Reserve Bank of Kansas City.
  14. Mark Aguiar & Manuel Amador, 2011. "Growth in the Shadow of Expropriation," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 651-697.
  15. Braggion, Fabio & Christiano, Lawrence J. & Roldos, Jorge, 2009. "Optimal monetary policy in a [`]sudden stop'," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 582-595, May.
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  17. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  18. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric Young, 2011. "Financial Crises and Macro-Prudential Policies," Research Department Publications 4710, Inter-American Development Bank, Research Department.
  19. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
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Cited by:
  1. Demian Pouzo & Ignacio Presno, 2012. "Sovereign default risk and uncertainty premia," Working Papers 12-11, Federal Reserve Bank of Boston.
  2. Yulei Luo & Jun Nie & Eric R. Young, 2013. "Robust Control, Informational Frictions, and International Consumption Correlations," Working Papers 212013, Hong Kong Institute for Monetary Research.

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