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Optimal Corrective Policies under Financial Frictions

Author

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  • Andreas Schabert

    (University of Cologne, Center for Macroeconomic Research, Albertus-Magnus-Platz, 50923 Cologne, Germany)

Abstract

This paper examines credit market policies under pecuniary externalities induced by collateral constraints. Pigouvian taxes/subsidies on debt or savings are derived as Ramsey-optimal policies. Firstly, prudential (ex-ante) debt taxes can restore constrained efficiency. Secondly, when policies are non-state and non-time contingent, debt subsidies can be superior to debt taxes. Thirdly, ex-ante saving subsidies are desirable when distributive effects dominate collateral effects. Fourthly, both effects can simultaneously be addressed by non-contingent saving subsidies. The analysis indicates that optimal policies can improve on constrained efficiency and that inefficiencies due to financial externalities can most effectively be addressed by interest rate reductions.

Suggested Citation

  • Andreas Schabert, 2021. "Optimal Corrective Policies under Financial Frictions," ECONtribute Discussion Papers Series 107, University of Bonn and University of Cologne, Germany.
  • Handle: RePEc:ajk:ajkdps:107
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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_107_2021.pdf
    File Function: First version, 2021
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    References listed on IDEAS

    as
    1. Javier Bianchi, 2011. "Overborrowing and Systemic Externalities in the Business Cycle," American Economic Review, American Economic Association, vol. 101(7), pages 3400-3426, December.
    2. Bilge Erten & Anton Korinek & José Antonio Ocampo, 2021. "Capital Controls: Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 59(1), pages 45-89, March.
    3. Anton Korinek & Damiano Sandri, 2016. "Capital Controls or Macroprudential Regulation?," NBER Chapters, in: NBER International Seminar on Macroeconomics 2015, National Bureau of Economic Research, Inc.
    4. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2016. "Optimal capital controls and real exchange rate policies: A pecuniary externality perspective," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 147-165.
    5. Eduardo Dávila & Anton Korinek, 2018. "Pecuniary Externalities in Economies with Financial Frictions," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 352-395.
    6. 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.
    7. James Cloyne & Kilian Huber & Ethan Ilzetzki & Henrik Kleven, 2019. "The Effect of House Prices on Household Borrowing: A New Approach," American Economic Review, American Economic Association, vol. 109(6), pages 2104-2136, June.
    8. Olivier Jeanne & Anton Korinek, 2020. "Macroprudential Regulation versus mopping up after the crash," Review of Economic Studies, Oxford University Press, vol. 87(3), pages 1470-1497.
    9. Stephanie Schmitt-Grohé & Martín Uribe, 2017. "Is Optimal Capital Control Policy Countercyclical in Open Economy Models with Collateral Constraints?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(3), pages 498-527, August.
    10. Korinek, Anton, 2018. "Regulating capital flows to emerging markets: An externality view," Journal of International Economics, Elsevier, vol. 111(C), pages 61-80.
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    Cited by:

    1. Christian Loenser & Joost Röttger & Andreas Schabert, 2022. "Financial Regulation, Interest Rate Responses, and Distributive Effects," ECONtribute Discussion Papers Series 143, University of Bonn and University of Cologne, Germany.

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    More about this item

    Keywords

    Pecuniary externalities; collateral constraint; incomplete markets; Pigouvian policies; inequality;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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