Optimal Corrective Policies under Financial Frictions

Andreas Schabert ()
Additional contact information
Andreas Schabert: University of Cologne, Center for Macroeconomic Research, Albertus-Magnus-Platz, 50923 Cologne, Germany

No 107, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: This paper examines credit market policies under pecuniary externalities induced by collateral constraints. Pigouvian taxes/subsidies on debt or savings are derived as Ramsey-optimal policies. Firstly, prudential (ex-ante) debt taxes can restore constrained efficiency. Secondly, when policies are non-state and non-time contingent, debt subsidies can be superior to debt taxes. Thirdly, ex-ante saving subsidies are desirable when distributive effects dominate collateral effects. Fourthly, both effects can simultaneously be addressed by non-contingent saving subsidies. The analysis indicates that optimal policies can improve on constrained efficiency and that inefficiencies due to financial externalities can most effectively be addressed by interest rate reductions.

Keywords: Pecuniary externalities; collateral constraint; incomplete markets; Pigouvian policies; inequality (search for similar items in EconPapers)
JEL-codes: E44 G28 H23 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2021-07
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_107_2021.pdf First version, 2021 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:107

Access Statistics for this paper

More papers in ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany Niebuhrstrasse 5, 53113 Bonn, Germany.
Bibliographic data for series maintained by ECONtribute Office ().