Managing Credit Booms and Busts: A Pigouvian Taxation Approach

No WP10-12, Working Paper Series from 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 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.

Keywords: boom-bust cycles; financial crises; systemic externalities; macroprudential regulation; precautionary savings (search for similar items in EconPapers)
JEL-codes: E44 G38 (search for similar items in EconPapers)
Date: 2010-09
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (213)

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Related works:
Journal Article: Managing credit booms and busts: A Pigouvian taxation approach (2019)
Working Paper: Managing Credit Booms and Busts: A Pigouvian Taxation Approach (2010)
Working Paper: Managing Credit Booms and Busts: A Pigouvian Taxation Approach (2010)
Working Paper: Managing Credit Booms and Busts: A Pigouvian Taxation Approach (2010)
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