Prudential Capital Controls or Bailouts? The Impact of Different Collateral Constraint Assumptions

24 Pages Posted: 6 Mar 2014 Last revised: 11 Mar 2014

See all articles by Mitsuru Katagiri

Mitsuru Katagiri

Bank of Japan

Ryo Kato

Asia University; TCER

Takayuki Tsuruga

Osaka University, Institute of Social and Economic Research

Date Written: March 1, 2014

Abstract

A fast growing literature on small open economy models with pecuniary externalities has provided the theoretical grounds for the policy analysis of macro prudential regulations. Using the framework of Jeanne and Korinek (2010), we investigate whether a subsidy on debt during crises as a form of bailout can outperform prudential capital controls. We show that the result depends on the functional form of the collateral constraint faced by households. If households collateralize their assets that they purchase at the same time as their borrowing, subsidizing debt during crises is preferable. If, on the other hand, the maximum borrowing is constrained by the value of their assets that they have purchased before they borrow, a stronger case can be made for prudential capital controls.

Keywords: Financial crises, Credit externalities, Bailouts, Macroprudential policies

JEL Classification: E32, G01, G18

Suggested Citation

Katagiri, Mitsuru and Kato, Ryo and Tsuruga, Takayuki, Prudential Capital Controls or Bailouts? The Impact of Different Collateral Constraint Assumptions (March 1, 2014). CAMA Working Paper No. 25/2014, Available at SSRN: https://ssrn.com/abstract=2403604 or http://dx.doi.org/10.2139/ssrn.2403604

Mitsuru Katagiri

Bank of Japan ( email )

2-1-1 Nihonbashi-Hongokucho,Chuo-ku
Tokyo
Japan

HOME PAGE: http://www.boj.or.jp/en/about/index.htm/

Ryo Kato

Asia University ( email )

5-8 Sakai, Musashisno
Tokyo, 1808629
Japan

TCER ( email )

Sankyo Building
Room 703, Main Building
Chiyoda-ku, Tokyo, 1-7-10
Japan

Takayuki Tsuruga (Contact Author)

Osaka University, Institute of Social and Economic Research ( email )

6-1 Mihogaoka
Ibaraki, 567-0047
Japan

HOME PAGE: http://www.iser.osaka-u.ac.jp/~tsuruga/

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