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Financial Regulation, Interest Rate Responses, and Distributive Effects

Author

Listed:
  • Christian Loenser

    (University of Cologne)

  • Joost Röttger

    (Deutsche Bundesbank)

  • Andreas Schabert

    (University of Cologne)

Abstract

This paper examines financial regulation and distortionary taxes in a heterogeneous-agents economy with pecuniary externalities induced by a collateral constraint. Limiting of the loan-to-value benefits only few unconstrained borrowers and reduces ex-ante social welfare. A Pigouvian-style symmetric debt tax (that subsidizes savings) raises collateral prices and lowers interest rates, which stimulates borrowing and generates welfare gains for almost all income groups. A Pigouvian-style asset subsidy induces a wealth appreciation, while an asset tax particularly benefits low-wealth borrowers and enhances social welfare. Overall, collateral effects are of minor importance and interest rate rather than asset price responses are decisive for welfare effects.

Suggested Citation

  • 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.
    • Handle: RePEc:ajk:ajkdps:143
    as

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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_143_2022.pdf
    File Function: First version, 2022
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial regulation; heterogeneous agents; collateral constraint; pecuniary externalities;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • 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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