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Managing Credit Booms and Busts : A Pigouvian Taxation Approach

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  • Jeanne, O.
  • Korinek, A.

Abstract

We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We show that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare. We calibrate the model by reference to (i) the US small and medium-sized enterprise sector and (ii) the household sector, and find the optimal tax to be countercyclical in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.
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  • Jeanne, O. & Korinek, A., 2010. "Managing Credit Booms and Busts : A Pigouvian Taxation Approach," Other publications TiSEM 8593f3f8-b0cb-48d2-b7e1-9, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:8593f3f8-b0cb-48d2-b7e1-9d523d74fcfc
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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