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. Using the framework of Jeanne and Korinek (2010), we investigate whether a subsidy on debt during crises as a form of bailout can outperform prudential capital controls. We show that the result depends on the functional form of the collateral con straint faced by households. If households collateralize their assets that they purchase at the same time as their borrowing, subsidizing debt during crises is preferable. If, on the other hand, the maximum borrowing is constrained by the value of their assets that they have purchased before they borrow, a stronger case can be made for prudential capital controls. capital controls.Length: 17 pages

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)
Date: 2013-03
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