Managing credit booms and busts: A Pigouvian taxation approach

Olivier Jeanne and Anton Korinek

Journal of Monetary Economics, 2019, vol. 107, issue C, 2-17

Abstract: The interaction between debt accumulation and asset prices magnifies credit booms and busts. 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 in a dynamic model that a time-consistent policymaker finds it optimal to internalize these externalities by imposing a Pigouvian tax on borrowing that is the product of three simple sufficient statistics. A numerical illustration shows that the optimal tax is countercyclical: it rises during booms but can be set to zero in busts when the financial constraint is binding. The optimal macroprudential tax is a non-trivial function of the environment.

Keywords: Macroprudential regulation; Boom-bust cycles; Financial crises; Pecuniary externalities; Precautionary savings (search for similar items in EconPapers)
JEL-codes: E44 G01 G38 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (70)

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Related works:
Working Paper: Managing Credit Booms and Busts: A Pigouvian Taxation Approach (2010)
Working Paper: Managing Credit Booms and Busts: A Pigouvian Taxation Approach (2010)
Working Paper: Managing Credit Booms and Busts: A Pigouvian Taxation Approach (2010)
Working Paper: Managing Credit Booms and Busts: A Pigouvian Taxation Approach (2010)
Working Paper: Managing Credit Booms and Busts: A Pigouvian Taxation Approach (2010)
Working Paper: Managing Credit Booms and Busts: A Pigouvian Taxation Approach (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:107:y:2019:i:c:p:2-17

DOI: 10.1016/j.jmoneco.2018.12.005

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