Managing Credit Booms and Busts: A Pigouvian Taxation Approach

O. Jeanne, A. Korinek

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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
PublisherFinance
Number of pages36
Volume2010-108S
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-108S

Keywords

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

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    Jeanne, O., & Korinek, A. (2010). Managing Credit Booms and Busts: A Pigouvian Taxation Approach. (CentER Discussion Paper; Vol. 2010-108S). Finance.