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Prudential capital controls or bailouts? The impact of different collateral constraint assumptions

Author

Listed:
  • Mitsuru Katagiri

    (Bank of Japan)

  • Ryo Kato

    (Bank of Japan)

  • Takayuki Tsuruga

    () (Kyoto University
    Centre for Applied Macroeconomic Analysis
    Cabinet Office, Government of Japan)

Abstract

Abstract The literature on small open-economy models with collateral constraints has provided the theoretical grounds for macroprudential regulations. This paper examines a subsidy on debt during a crisis as a form of bailout in comparison with prudential capital controls. We show that the policy prescription on bailouts differs substantially between the timing assumptions of the collateral constraint of households. If borrowing is constrained by the value of assets that households have purchased before they borrow, the bailout is neutral, suggesting that prudential capital controls are preferable. If, on the other hand, households collateralize their assets that they purchase at the same time as their borrowing, the bailout replicates the unconstrained allocation without collateral constraint and outperforms prudential capital controls. Even in the latter case, however, our numerical experiments suggest that such bailouts restoring the unconstrained allocation may not be implementable in terms of its size and frequency.

Suggested Citation

  • Mitsuru Katagiri & Ryo Kato & Takayuki Tsuruga, 2017. "Prudential capital controls or bailouts? The impact of different collateral constraint assumptions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(4), pages 943-960, April.
  • Handle: RePEc:spr:joecth:v:63:y:2017:i:4:d:10.1007_s00199-016-0975-2 DOI: 10.1007/s00199-016-0975-2
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial crises; Credit externalities; Bailouts; Macroprudential policies;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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