(Macro) Prudential Taxation of Good News

38 Pages Posted: 30 Jul 2019

See all articles by Facundo Piguillem

Facundo Piguillem

Einaudi Institute for Economics and Finance (EIEF)

Jean Flemming

Einaudi Institute for Economics and Finance (EIEF)

Jean-Paul L'Huillier

Brandeis University

Date Written: June 2019

Abstract

We analyze the optimal macroprudential policy under the presence of news shocks. News are shocks to the growth rate that convey information about future growth. In this context, crises are characterized by long periods with positive shocks (and good news) that eventually revert,rendering the collateral constraint binding and triggering deleveraging. In this environment it is optimal to tax borrowing during good times, and let agents act freely leaving the allocations undistorted, including borrowing and lending, when the economy reverts to a bad state. We contrast our findings to the case of standard, shocks to the level of income, where it is optimal to tax debt in bad times, when agents need to borrow the most for precautionary savings motives. Also, taxes are used much less often and are around one-tenth of those under level shocks.

Keywords: financial crises, macroprudential policy, Pecuniary externality

JEL Classification: E32, E44, G18

Suggested Citation

Piguillem, Facundo and Flemming, Jean and L'Huillier, Jean-Paul, (Macro) Prudential Taxation of Good News (June 2019). CEPR Discussion Paper No. DP13816, Available at SSRN: https://ssrn.com/abstract=3428336

Facundo Piguillem

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana, 62
Rome, 00187
Italy

Jean Flemming (Contact Author)

Einaudi Institute for Economics and Finance (EIEF)

Via Due Macelli, 73
Rome, 00187
Italy

Jean-Paul L'Huillier

Brandeis University ( email )

Waltham, MA 02454-9110
United States

HOME PAGE: http://https://sites.google.com/site/jplhuill/

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