IDEAS home Printed from https://ideas.repec.org/p/col/000094/012027.html
   My bibliography  Save this paper

Financial crises, debt volatility and optimal taxes

Author

Listed:
  • Julian A. Parra-Polania

    ()

  • Carmiña O. Vargas

    ()

Abstract

We study financial crises in a small open production economy subject to credit constraint and uncertainty on the value of debt repayments. We find that the possibility of reducing the severity of future crises encourages the central planner (CP) to increase both the crisis frequency and current debt. The CP equilibrium can be implemented by a macro-prudential tax on debt and, only during crises, subsidies on consumption and a tax on non-tradable labor. The welfare gain of implementing such equilibrium is small for the baseline scenario but very sensitive to changes in debt volatility and the economy’s degree of openness.

Suggested Citation

  • Julian A. Parra-Polania & Carmiña O. Vargas, 2014. "Financial crises, debt volatility and optimal taxes," BORRADORES DE ECONOMIA 012027, BANCO DE LA REPÚBLICA.
    • Handle: RePEc:col:000094:012027
    as

    Download full text from publisher

    File URL: http://www.banrep.gov.co/sites/default/files/publicaciones/archivos/be_839.pdf
    Download Restriction: no

    Other versions of this item:

    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. Anton Korinek, 2011. "The New Economics of Prudential Capital Controls: A Research Agenda," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(3), pages 523-561, August.
    3. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2013. "Financial crises and macro-prudential policies," Journal of International Economics, Elsevier, vol. 89(2), pages 453-470.
    4. 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.
    5. Reuven Glick & Xueyan Guo & Michael Hutchison, 2006. "Currency Crises, Capital-Account Liberalization, and Selection Bias," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 698-714, November.
    6. Olivier Jeanne & Anton Korinek, 2010. "Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach," American Economic Review, American Economic Association, vol. 100(2), pages 403-407, May.
    7. Glick, Reuven & Hutchison, Michael, 2005. "Capital controls and exchange rate instability in developing economies," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 387-412, April.
    8. Julian Parra-Polania & Carmiña Vargas, 2015. "Optimal tax on capital inflows discriminated by debt-risk profile," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(1), pages 102-119, February.
    9. repec:oup:ecpoli:v:16:y:2001:i:32:p:51-82 is not listed on IDEAS
    10. Enrique G. Mendoza, 2002. "Credit, Prices, and Crashes: Business Cycles with a Sudden Stop," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 335-392, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Julian A. Parra-Polania & Carmiña O. Vargas, 2015. "Macroprudential vs. Ex-post Policy Interventions: when Domestic Taxes are Relevant for International Lenders," BORRADORES DE ECONOMIA 012698, BANCO DE LA REPÚBLICA.
    2. Olivier Jeanne, 2013. "Macroprudential policies in a global perspective," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-38.
    3. Korinek, Anton, 2018. "Regulating capital flows to emerging markets: An externality view," Journal of International Economics, Elsevier, vol. 111(C), pages 61-80.
    4. Korinek, Anton & Sandri, Damiano, 2016. "Capital controls or macroprudential regulation?," Journal of International Economics, Elsevier, vol. 99(S1), pages 27-42.
    5. Anton Korinek, 2011. "The New Economics of Capital Controls Imposed for Prudential Reasons+L4888," IMF Working Papers 11/298, International Monetary Fund.
    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. Ghosh, Atish R. & Ostry, Jonathan D. & Qureshi, Mahvash S., 2018. "Taming the Tide of Capital Flows: A Policy Guide," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262037165, September.
    8. Fornaro, Luca, 2015. "Financial crises and exchange rate policy," Journal of International Economics, Elsevier, vol. 95(2), pages 202-215.
    9. Engel, Charles, 2016. "Macroprudential policy under high capital mobility: policy implications from an academic perspective," Journal of the Japanese and International Economies, Elsevier, vol. 42(C), pages 162-172.
    10. Ma, Chang, 2020. "Financial stability, growth and macroprudential policy," Journal of International Economics, Elsevier, vol. 122(C).
    11. Hao Jin & Hewei Shen, 2020. "Foreign Asset Accumulation among Emerging Market Economies: a Case for Coordination," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 54-73, January.
    12. Javier Bianchi & Chenxin Liu & Enrique G. Mendoza, 2016. "Fundamentals News, Global Liquidity, and Macroprudential Policy," NBER Chapters, in: NBER International Seminar on Macroeconomics 2015, National Bureau of Economic Research, Inc.
    13. Shigeto Kitano & Kenya Takaku, 2018. "Capital Controls, Monetary Policy, And Balance Sheets In A Small Open Economy," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 859-874, April.
    14. Stephanie Schmitt-Grohé & Martín Uribe, 2017. "Adjustment to small, large, and sunspot shocks in open economies with stock collateral constraints," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, vol. 35(82), pages 2-9, April.
    15. Devereux, Michael B. & Young, Eric R. & Yu, Changhua, 2019. "Capital controls and monetary policy in sudden-stop economies," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 52-74.
    16. Lorenzoni, Guido, 2014. "International Financial Crises," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.),Handbook of International Economics, edition 1, volume 4, chapter 0, pages 689-740, Elsevier.
    17. Cantú, Carlos, 2019. "Effects of capital controls on foreign exchange liquidity," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 201-222.
    18. Ricardo M. Reyes-Heroles & Gabriel Tenorio, 2017. "Managing Capital Flows in the Presence of External Risks," International Finance Discussion Papers 1213, Board of Governors of the Federal Reserve System (U.S.).
    19. Julian A. Parra-Polania & Carmiña O. Vargas, 2016. "Relevance of the fiscal-policy setup in the analysis of macroprudential and ex-post financial crisis interventions," Borradores de Economia 945, Banco de la Republica de Colombia.
    20. Nadav Ben Zeev, 2019. "Asymmetric Business Cycles In Emerging Market Economies," Working Papers 1909, Ben-Gurion University of the Negev, Department of Economics.

    More about this item

    Keywords

    Financial crisis; capital controls; debt shocks; optimal tax.;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000094:012027. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Clorith Angélica Bahos Olivera). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.