Optimal corrective policies under financial frictions

Andreas Schabert

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.

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Year of publication:	July 2021
Authors:	Schabert, Andreas
Publisher:	Bonn : ECONtribute
Subject:	Pecuniary externalities \| collateral constraint \| incomplete markets \| Pigouvian policies \| inequality \| Unvollkommener Markt \| Incomplete market \| Theorie \| Theory \| Kreditsicherung \| Collateral \| Externer Effekt \| Externalities \| Finanzmarkt \| Financial market \| Liquiditätsbeschränkung \| Liquidity constraint \| Finanzkrise \| Financial crisis