Economic Theory

, Volume 63, Issue 4, pp 943–960 | Cite as

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

  • Mitsuru Katagiri
  • Ryo Kato
  • Takayuki TsurugaEmail author
Research Article


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.


Financial crises Credit externalities Bailouts  Macroprudential policies 

JEL Classification

E32 F38 G01 G18 



We would like to thank Gianluca Benigno, Timothy Kam, Takashi Kamihigashi, Timothy Kehoe, Shigeto Kitano, Keiichiro Kobayashi, Teruyoshi Kobayashi, Césaire Meh, Eric R. Young, the staff of the Bank of Japan, and two anonymous referees for helpful comments. We also thank participants at numerous universities and conferences for helpful discussions. Tsuruga in Kyoto University gratefully acknowledges the financial support of a Grant-in-Aid for Scientific Research. Views expressed in this paper are those of the authors and do not necessarily reflect the official views of the institutions that the authors belong to.

Supplementary material

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


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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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