Author: Anton Korinek / Publishing Institution: Peterson Institute for International Economics

Author:: Olivier Jeanne and Anton Korinek
Publication Date:: 05-2010
Content Type:: Working Paper
Institution:: Peterson Institute for International Economics
Abstract:: This paper analyzes prudential controls on capital flows to emerging markets from the perspective of a Pigouvian tax that addresses externalities associated with the deleveraging cycle. It presents a model in which restricting capital inflows during boom times reduces the potential outflows during busts. This mitigates the feedback effects of deleveraging episodes, when tightening financial constraints on borrowers and collapsing prices for collateral assets have mutually reinforcing effects. In our model, capital controls reduce macroeconomic volatility and increase standard measures of consumer welfare.
Topic:: Economics, Emerging Markets, International Trade and Finance, Foreign Direct Investment, and Financial Crisis

Author:: Olivier Jeanne and Anton Korinek
Publication Date:: 09-2010
Content Type:: Working Paper
Institution:: Peterson Institute for International Economics
Abstract:: 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 with reference to (1) the US small and medium-sized enterprise sector and (2) the household sector and find the optimal tax to be countercy - clical in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.
Topic:: Debt, Economics, Global Recession, and Financial Crisis
Political Geography:: United States

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