Macroprudential vs. ex-post policy interventions : when domestic taxes are relevant for international lenders

Abstract

We argue that international lenders take into account that taxes (or subsidies) a¤ect borrowers'income available for debt repayments. Using an endowment-economy model, we show that by incorporating this fact into the analysis of …nancial crises from the pecuniary externality perspective, ex-post interventions are completely ine¤ective to manage crises and, instead, ex-ante capital controls are useful for correcting the externality that stems from the underestimation of the social costs of decentralized debt decisions.

Optimal crisis interventions in an open economy with credit constraint

“…Dividing (19) by (20) and taking into account that c SP t = c t and SP t+1 = t+1 (since the tax equalizes the allocations), the optimal tax can be expressed as follows: 6 Notice from (11) that SP…”

“…Incorporating the SGU tax modi…es one equation ((7) turns into (17)) and adds one variable to the system ( t ). It does not add any further equation since (22) is just a combination of two other equations already present in the system,(6) and (17). There are in…nite possible combinations of c T t , t , d t+1 , p t and the SGU tax t that solve the corresponding equation system.…”

“…(23)Solutions for c T t , d t+1 and p t are obtained from the subsystem of Equations (8), (9) and (23), independently from the other equations of the whole system. With a solution for c T t we can solve for t , from(6), and for t , from (22). Therefore, from (17), t only a¤ects the value of t 7.…”

Analysis of macro‐prudential and ex post financial crisis interventions: Relevance of the fiscal‐policy setup

“…In a previous version of this document (Parra‐Polania & Vargas, 2015) and in Section 2.1 of the present version, we analyse financial crises incorporating, into a standard framework, the effect of lump‐sum taxes/subsidies on borrowers' debt capacity. In that section, we assume that there is a balance‐budget fiscal policy as is common in the literature.…”

Relevance of the fiscal-policy setup in the analysis of macroprudential and ex-post financial crisis interventions

“…By going to court, the lender recovers only a fraction of seizable income, since taxes must be paid to the government. 1 In a previous paper (Parra-Polania and Vargas, 2015), we analyze …nancial crises incorporating, into a standard framework, the e¤ect of lump-sum taxes/subsidies on borrowers'debt capacity. Furthermore, we follow common practice and assume that there is a balance-budget …scal policy.…”