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Prudential Capital Controls: The Impact of Different Collateral Constraint Assumptions

  • Mitsuru Katagiri
  • Ryo Kato
  • Takayuki Tsuruga

A fast-growing literature on small open economy models with pecuniary external- ities has provided the theoretical grounds for the policy analysis of macro-prudential regulations and bailouts. Benigno, Chen, Otrok, Rebucci, and Young (2012a) recently showed that the macro-prudential regulations are desirable if the policy instrument is restricted to capital controls. Using the framework of Jeanne and Korinek (2010), we show that this result depends on the functional form of the collateral constraint which households are faced with. If households collateralize their assets that they purchase at the same time as their borrowing, capital controls in the form of bailout subsidy during crises can be optimal because they can achieve the rst best allocation. If, on the other hand, the maximum borrowing is constrained by their assets that they have purchased before they borrow, a stronger case can be made for ex ante macro- prudential regulations.

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File URL: http://www.econ.kyoto-u.ac.jp/projectcenter/Paper/e-12-014.pdf
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Paper provided by Graduate School of Economics Project Center, Kyoto University in its series Discussion papers with number e-12-014.

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Length: 17 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:kue:dpaper:e-12-014
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  1. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric Young, 2012. "Optimal Policy for Macro-Financial Stability," Research Department Publications 4818, Inter-American Development Bank, Research Department.
  2. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2012. "Capital controls or exchange rate policy? A pecuniary externality perspective," LSE Research Online Documents on Economics 51505, London School of Economics and Political Science, LSE Library.
  3. Bianchi, Javier, 2009. "Overborrowing and Systemic Externalities in the Business Cycle," MPRA Paper 16270, University Library of Munich, Germany.
  4. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
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