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Financial Regulation, Interest Rate Responses, and Distributive Effects

Christian Loenser, Joost Röttger and Andreas Schabert ()
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Christian Loenser: University of Cologne
Joost Röttger: Deutsche Bundesbank
Andreas Schabert: University of Cologne

No 143, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: This paper examines financial regulation and distortionary taxes in a heterogeneous-agents economy with pecuniary externalities induced by a collateral constraint. Limiting of the loan-to-value benefits only few unconstrained borrowers and reduces ex-ante social welfare. A Pigouvian-style symmetric debt tax (that subsidizes savings) raises collateral prices and lowers interest rates, which stimulates borrowing and generates welfare gains for almost all income groups. A Pigouvian-style asset subsidy induces a wealth appreciation, while an asset tax particularly benefits low-wealth borrowers and enhances social welfare. Overall, collateral effects are of minor importance and interest rate rather than asset price responses are decisive for welfare effects.

Keywords: Financial regulation; heterogeneous agents; collateral constraint; pecuniary externalities (search for similar items in EconPapers)
JEL-codes: D31 E44 G28 H23 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2022-02
New Economics Papers: this item is included in nep-ban, nep-mac, nep-pub and nep-reg
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