Macro-prudential taxation in good times

Jean Flemming, Jean-Paul L'Huillier and Facundo Piguillem

Journal of International Economics, 2019, vol. 121, issue C

Abstract: We analyze the optimal macroprudential policy under the presence of persistent permanent shocks, which convey information about future growth. In this context, crises are characterized by long periods with positive shocks that eventually revert, rendering the collateral constraint binding and triggering deleveraging. In this environment it is optimal to tax borrowing during good times, and let agents act freely leaving the allocations undistorted, including borrowing and lending, when the economy reverts to a bad state. We contrast our findings to the case of standard shocks to the level of income, where it is optimal to tax debt in bad times, when agents need to borrow the most for precautionary savings motives. Also, taxes are used much less often and are around one-tenth of those under level shocks.

Keywords: Macroprudential policy; Financial crises; Pecuniary externality (search for similar items in EconPapers)
JEL-codes: E32 E44 G18 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:121:y:2019:i:c:s0022199619300698

DOI: 10.1016/j.jinteco.2019.103251

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