Macroprudential Policy When the Poor Cannot Borrow

Emerging markets with greater inequality tend to have fewer capital controls. We propose a novel dynamic real-exchange-rate distributional externality as a potential explanation. Our model features nonhomothetic preferences, collateral- constrained high-income borrowers, and low-income hand-to-mouth households. Borrowing generates intertemporal redistribution through the real exchange rate. A planner can improve redistribution by manipulating the terms of trade in favor of the poor. We decompose the optimal borrowing tax into Fisherian and distribu- tional components. Incorporating inequality can substantially lower the average optimal macroprudential tax, even generating a subsidy. Our mechanism remains quantitatively significant in a production economy as long as wages are flexible.