Hoarding International Reserves Versus a Pigovian Tax-Cum-Subsidy Scheme: Reflections on the Deleveraging Crisis of 2008-9, and a Cost Benefit Analysis

Joshua Aizenman

No 15484, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We outline the case for supporting self-insurance by imposing a tax on external borrowing in a model of an emerging market. Entrepreneurs finance tangible investments via bank intermediation of foreign borrowing, exposing the economy to negative fire-sale externalities at times of deleveraging; a risk that increases with the ratio of aggregate external borrowing to international reserves. Price taking economic agents ignore their marginal impact on the expected cost of a deleveraging crisis. The optimal borrowing tax reduces the distorted activity, external borrowing, and induces borrowers to co-finance the precautionary hoarding of international reserves.

JEL-codes: F15 F21 F32 F36 G15 (search for similar items in EconPapers)
Date: 2009-11
Note: ITI
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Citations: View citations in EconPapers (21)

Published as Joshua Aizenman, 2010. "Hoarding international reserves versus a Pigovian tax-cum-subsidy scheme: Reflections on the deleveraging crisis of 2008-9, and a cost benefit analysis," Proceedings, Federal Reserve Bank of San Francisco, issue Oct.

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Journal Article: Hoarding international reserves versus a Pigovian tax-cum-subsidy scheme: Reflections on the deleveraging crisis of 2008-9, and a cost benefit analysis (2010)
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