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Prudential Capital Controls or Bailouts? The Impact of Different Collateral Constraint Assumptions

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  • Mitsuru Katagiri
  • Ryo Kato
  • Takayuki Tsuruga
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Abstract

A fast growing literature on small open economy models with pecuniary externalities has provided the theoretical grounds for the policy analysis of macro prudential regulations. Using the framework of Jeanne and Korinek (2010), we investigate whether a subsidy on debt during crises as a form of bailout can outperform prudential capital controls. We show that the result depends on the functional form of the collateral constraint faced by households. If households collateralize their assets that they purchase at the same time as their borrowing, subsidizing debt during crises is preferable. If, on the other hand, the maximum borrowing is constrained by the value of their assets that they have purchased before they borrow, a stronger case can be made for prudential capital controls.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-03/25_2014_katagiri_kato_tsuruga.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2014-25.

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Length: 24 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:een:camaaa:2014-25

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Keywords: Financial crises; Credit externalities; Bailouts; Macroprudential policies;

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