Managing Credit Booms and Busts

A Pigouvian Taxation Approach

O. Jeanne, A. Korinek

Research output: Working paperDiscussion paperOther research output

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Abstract

We study a dynamic model in which the interaction between debt ac- cumulation and asset prices magni es credit booms and busts. We find that borrowers do not internalize these feedback e¤ects and therefore suf- fer 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 nd the optimal tax to be countercycli- cal in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages36
Volume2010-27S
Publication statusPublished - 2010

Publication series

NameEBC Discussion Paper
Volume2010-27S

Fingerprint

Credit booms
Debt
Asset prices
Taxation
Small and medium-sized enterprises
Optimal tax
Pigouvian tax
Borrowing
Household
Externalities
Credit
Interaction

Keywords

  • boom-bust cycles
  • financial crises
  • systemic externalities
  • macro-prudential regulation
  • precautionary savings

Cite this

Jeanne, O., & Korinek, A. (2010). Managing Credit Booms and Busts: A Pigouvian Taxation Approach. (EBC Discussion Paper; Vol. 2010-27S). Tilburg: EBC.
Jeanne, O. ; Korinek, A. / Managing Credit Booms and Busts : A Pigouvian Taxation Approach. Tilburg : EBC, 2010. (EBC Discussion Paper).
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Jeanne, O & Korinek, A 2010 'Managing Credit Booms and Busts: A Pigouvian Taxation Approach' EBC Discussion Paper, vol. 2010-27S, EBC, Tilburg.

Managing Credit Booms and Busts : A Pigouvian Taxation Approach. / Jeanne, O.; Korinek, A.

Tilburg : EBC, 2010. (EBC Discussion Paper; Vol. 2010-27S).

Research output: Working paperDiscussion paperOther research output

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T1 - Managing Credit Booms and Busts

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N1 - This is also CentER Discussion Paper 2010-108S Pagination: 36

PY - 2010

Y1 - 2010

N2 - We study a dynamic model in which the interaction between debt ac- cumulation and asset prices magni es credit booms and busts. We find that borrowers do not internalize these feedback e¤ects and therefore suf- fer 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 nd the optimal tax to be countercycli- cal in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.

AB - We study a dynamic model in which the interaction between debt ac- cumulation and asset prices magni es credit booms and busts. We find that borrowers do not internalize these feedback e¤ects and therefore suf- fer 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 nd the optimal tax to be countercycli- cal in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.

KW - boom-bust cycles

KW - financial crises

KW - systemic externalities

KW - macro-prudential regulation

KW - precautionary savings

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BT - Managing Credit Booms and Busts

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Jeanne O, Korinek A. Managing Credit Booms and Busts: A Pigouvian Taxation Approach. Tilburg: EBC. 2010. (EBC Discussion Paper).