Working Paper: NBER ID: w16377
Authors: Olivier Jeanne; Anton Korinek
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 by reference to (i) the US small and medium-sized enterprise sector and (ii) 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: credit booms; credit busts; Pigouvian taxation; asset prices; systemic risk
JEL Codes: E44; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt accumulation (H63) | systemic externalities (D62) |
| systemic externalities (D62) | excessive debt accumulation (F65) |
| Pigouvian tax on borrowing (H23) | internalization of externalities (D62) |
| internalization of externalities (D62) | increased welfare (I38) |
| debt accumulation (H63) | asset price fluctuations (G19) |
| asset price fluctuations (G19) | detrimental booms and busts (E32) |
| optimal tax (H21) | excessive borrowing (F65) |
| optimal tax is countercyclical (H21) | tax increases during booms (H29) |
| optimal tax is countercyclical (H21) | tax decreases during busts (H29) |