Financial crises, debt volatility and optimal taxes

Julián Parra-Polanía and Carmina Vargas

Borradores de Economia from Banco de la Republica de Colombia

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.

JEL-codes: F34 F41 H21 (search for similar items in EconPapers)
Pages: 14
Date: 2014-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-pub
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https://doi.org/10.32468/be.839 (application/pdf)

Related works:
Working Paper: Financial crises, debt volatility and optimal taxes (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:839

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