Macroprudential Policy When the Poor Cannot Borrow

Fernando Arce (), Yaakov Levin () and Monica Tran-Xuan ()
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Fernando Arce: Inter-American Development Bank
Yaakov Levin: Boston College, Postal: Dept. of Economics, Boston College, Chestnut Hill, MA 02467 USA
Monica Tran-Xuan: IMF

No 1118, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Emerging markets with greater inequality tend to have fewer capital controls. We propose a novel dynamic real-exchange-rate distributional externality as a potential explanation. Our model features nonhomothetic preferences, collateral- constrained high-income borrowers, and low-income hand-to-mouth households. Borrowing generates intertemporal redistribution through the real exchange rate. A planner can improve redistribution by manipulating the terms of trade in favor of the poor. We decompose the optimal borrowing tax into Fisherian and distribu- tional components. Incorporating inequality can substantially lower the average optimal macroprudential tax, even generating a subsidy. Our mechanism remains quantitatively significant in a production economy as long as wages are flexible.

Keywords: Inequality; Macroprudential policy; Nonhomothetic preferences; Sudden Stops (search for similar items in EconPapers)
JEL-codes: E32 F34 F41 H23 (search for similar items in EconPapers)
Date: 2026-11-06
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