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Managing credit booms and busts: A Pigouvian taxation approach

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  • Jeanne, Olivier
  • Korinek, Anton

Abstract

The interaction between debt accumulation and asset prices magnifies credit booms and busts. Borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We show in a dynamic model that a time-consistent policymaker finds it optimal to internalize these externalities by imposing a Pigouvian tax on borrowing that is the product of three simple sufficient statistics. A numerical illustration shows that the optimal tax is countercyclical: it rises during booms but can be set to zero in busts when the financial constraint is binding. The optimal macroprudential tax is a non-trivial function of the environment.

Suggested Citation

  • Jeanne, Olivier & Korinek, Anton, 2019. "Managing credit booms and busts: A Pigouvian taxation approach," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 2-17.
  • Handle: RePEc:eee:moneco:v:107:y:2019:i:c:p:2-17
    DOI: 10.1016/j.jmoneco.2018.12.005
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    More about this item

    Keywords

    Macroprudential regulation; Boom-bust cycles; Financial crises; Pecuniary externalities; Precautionary savings;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

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