Prudential Capital Controls: The Impact of Different Collateral Constraint Assumptions

Mitsuru Katagiri, Ryo Kato and Takayuki Tsuruga

Discussion papers from Graduate School of Economics Project Center, Kyoto University

Abstract: A fast-growing literature on small open economy models with pecuniary external- ities has provided the theoretical grounds for the policy analysis of macro-prudential regulations and bailouts. Benigno, Chen, Otrok, Rebucci, and Young (2012a) recently showed that the macro-prudential regulations are desirable if the policy instrument is restricted to capital controls. Using the framework of Jeanne and Korinek (2010), we show that this result depends on the functional form of the collateral constraint which households are faced with. If households collateralize their assets that they purchase at the same time as their borrowing, capital controls in the form of bailout subsidy during crises can be optimal because they can achieve the rst best allocation. If, on the other hand, the maximum borrowing is constrained by their assets that they have purchased before they borrow, a stronger case can be made for ex ante macro- prudential regulations.

Keywords: Financial crises; Credit externalities; Bailouts; Macroprudential policies (search for similar items in EconPapers)
JEL-codes: E32 G01 G18 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2013-03
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