Economic Theory

, Volume 63, Issue 4, pp 943–960

Prudential capital controls or bailouts? The impact of different collateral constraint assumptions

Research Article

DOI: 10.1007/s00199-016-0975-2

Cite this article as:
Katagiri, M., Kato, R. & Tsuruga, T. Econ Theory (2017) 63: 943. doi:10.1007/s00199-016-0975-2
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Abstract

The literature on small open-economy models with collateral constraints has provided the theoretical grounds for macroprudential regulations. This paper examines a subsidy on debt during a crisis as a form of bailout in comparison with prudential capital controls. We show that the policy prescription on bailouts differs substantially between the timing assumptions of the collateral constraint of households. If borrowing is constrained by the value of assets that households have purchased before they borrow, the bailout is neutral, suggesting that prudential capital controls are preferable. If, on the other hand, households collateralize their assets that they purchase at the same time as their borrowing, the bailout replicates the unconstrained allocation without collateral constraint and outperforms prudential capital controls. Even in the latter case, however, our numerical experiments suggest that such bailouts restoring the unconstrained allocation may not be implementable in terms of its size and frequency.

Keywords

Financial crises Credit externalities Bailouts  Macroprudential policies 

JEL Classification

E32 F38 G01 G18 

Supplementary material

199_2016_975_MOESM1_ESM.pdf (100 kb)
Supplementary material 1 (pdf 99 KB)

Funding information

Funder NameGrant NumberFunding Note
Grants-in-Aid for Scientific Research
  • 15H05729

Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  1. 1.Bank of JapanTokyoJapan
  2. 2.Graduate School of EconomicsKyoto UniversityKyotoJapan
  3. 3.Centre for Applied Macroeconomic AnalysisCanberraAustralia
  4. 4.Cabinet Office, Government of JapanTokyoJapan

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