Managing credit booms and busts: A Pigouvian taxation approach

By Anton Korinek. Journal of Monetary Economics, 2019

219 citations recorded by the source corpus.

We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that 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 that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare. We calibrate the model by reference to (i) the US small and medium-sized enterprise sector and (ii) the household sector, and find the optimal tax to be countercyclical in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/50d0d76840f139f311011b2f24fdfab392914aa7

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Citations in the corpus

Optimal Time-Consistent Macroprudential Policy (2017, methodology): “…probability of becoming binding at t 1 1, while the former are relevant only when the constraint is binding at t. Bianchi and Mendoza (2010) and Jeanne and Korinek (2010) study only the effects via qt11, but the above discussion suggests that the effects operating via qt should also be part of…”
Optimal Development Policies With Financial Frictions (2014, background): “7A related strand of work emphasizes a different type of pecuniary externality that operates through prices in borrowing constraints, for example Lorenzoni (2008), Jeanne and Korinek (2010) and Bianchi (2011).”
Real exchange rate policies for economic development (2017, unknown): “The large and growing literature on macroeconomic externalities (Jeanne and Korinek, 2010; Korinek, 2010, 2011) emphasizes that because of these externalities, there is no presumption that market determined exchange rates have optimality properties.”
Macroprudential Policy, Countercyclical Bank Capital Buffers, and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments (2017, unknown): “Credit cycles also stem from firms’ agency frictions as in Bernanke and Gertler (1989), Kiyotaki and Moore (1997), Lorenzoni (2008), Jeanne and Korinek (2012), Farhi and Werning (2014) and Korinek and Simsek (2016), though these models can also be interpreted as dealing with banks with agency…”
Regulating Capital Flows to Emerging Markets: An Externality View (2018, unknown): “(See Korinek, 2018, for a more detailed discussion of the benefits and disadvantages of DSGE models.) We also show that the methodology is robust to a range of model extensions in section 5. We apply this approach to quantify the externalities from capital flows in a number of emerging market crises”