Hostname: page-component-7b7567c8c-fvjsw Total loading time: 0 Render date: 2026-11-14T21:09:23.221Z Has data issue: false hasContentIssue false
  • English
  • Français

OPTIMAL POLICY IN COLLATERAL CONSTRAINED ECONOMIES

Published online by Cambridge University Press:  18 September 2017

Nina Biljanovska
Nina Biljanovska*
Affiliation:
International Monetary Fund
*
Address correspondence to: Nina Biljanovska, Institute for Capacity Development, International Monetary Fund, Washington, D.C. 20431, USA; e-mail: nbiljanovska@imf.org. Website: https://sites.google.com/site/biljanovska/.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

This paper examines optimal policy in a macroeconomic model with collateral constraints. Binding collateral constraints yield inefficient competitive equilibrium allocations because they distort the optimal utilization of real resources. I identify the set of policy instruments that can be used by a Ramsey planner to achieve the first-best and the second-best (i.e., constrained planner's) allocations. A system of distortionary taxes on capital and labor income, along with direct lump-sum transfers among borrowers and lenders replicates the first-best outcome. The tax rates correct for the marginal distortions, whereas the direct lump-sum transfers perform income redistributions among the agents. In absence of direct lump-sum transfers, the distortionary taxes have an additional role, i.e., to perform implicit income transfers, and only second-best outcomes are attainable. I also derive the optimal policy in response to real and financial shocks, and show how the policy recommendations differ depending on the set of policy instruments available.

Keywords

Collateral ConstraintsInefficienciesRamsey RegulationWelfare

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 2 , March 2019, pp. 798 - 836
Copyright
Copyright © Cambridge University Press 2017 

Footnotes

I am thankful to Ester Faia, Mikhail Golosov, Michael Haliassos, Alexandros Vardoulakis, Mirko Wiederholt, and two anonymous referees for extremely constructive comments and suggestions. The paper has greatly benefited from comments by participants at the 2013 SAET conference in Paris, the 2014 North American Summer Meeting of the Econometric Society at the University of Minnesota, 2015 Midwest Macro Conference at the University of Rochester, 2016 Midwest Macro Conference at Purdue University, Federal Reserve Board of Governors, Norges Bank, European Central Bank, Banque de France, and the Money Macro Brown Bag Seminar at Goethe University Frankfurt. The views expressed in this paper are my own and do not necessarily represent those of the IMF, its Executive Board, or its Management.

References

REFERENCES

Aiyagari, S. Rao (1995) Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting. Journal of Political Economy 103 (6), 1158–1175.10.1086/601445Google Scholar
Becker, R. A. (1980) On the long-run steady state in a simple dynamic model of equilibrium with heterogeneous households. Quarterly Journal of Economics 95, 375–382.10.2307/1885506Google Scholar
Bhandari, Anmol, Evans, David, Golosov, Mikhail, and Sargent, Thomas J. (2013) Taxes, Debts, and Redistributions with Aggregate Shocks. NBER working papers 19470.Google Scholar
Bianchi, Javier (2011) Overborrowing and systemic externalities in the business cycle. American Economic Review 101 (7), 3400–3426.10.1257/aer.101.7.3400Google Scholar
Bianchi, Javier and Mendoza, Enrique G. (2013) Optimal Time-Consistent Macroprudential Policy. NBER working papers 19704.Google Scholar
Chamley, Christophe (1986) Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica 54 (3), 607–622.10.2307/1911310Google Scholar
Chari, V. V., Christiano, Lawrence J., and Kehoe, Patrick J. (1994) Optimal fiscal policy in a business cycle model. Journal of Political Economy 102 (4), 617–652.10.1086/261949Google Scholar
Dávila, Julio, Hong, Jay H., Krusell, Per, and Ríos-Rull, José-Víctor (2012) Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks. Econometrica 80 (6), 2431–2467.Google Scholar
De Bonis, Valeria and Spataro, Luca (2005) Taxing capital income as pigouvian correction: The role of discounting the future. Macroeconomic Dynamics 9 (4), 469–477.10.1017/S1365100505040319Google Scholar
Dellas, H., Diba, B., and Loisel, O. (2015) Liquidity shocks, equity-market frictions, and optimal policy. Macroeconomic Dynamics 19 (6), 1195–1219.10.1017/S1365100513000795Google Scholar
Faia, Ester (2008) Ramsey monetary policy with capital accumulation and nominal rigidities. Macroeconomic Dynamics 12 (S1), 90–9910.1017/S1365100507070083Google Scholar
Faia, Ester and Iliopulos, Eleni (2011) Financial openness, financial frictions and optimal monetary policy. Journal of Economic Dynamics and Control 35 (11), 1976–1996.10.1016/j.jedc.2011.06.012Google Scholar
Fostel, Ana and Geanakoplos, John (2008) Leverage cycles and the anxious economy. American Economic Review 98 (4), 1211–1244.10.1257/aer.98.4.1211Google Scholar
Geanakoplos, John and Zame, William R. (2014) Collateral equilibrium, I: A basic framework. Economic Theory 56 (3), 443–492.10.1007/s00199-013-0797-4Google Scholar
Hubbard, R. Glenn and Judd, Kenneth L. (1986) Liquidity constraints, fiscal policy, and consumption. Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution 17 (1), 1–60.Google Scholar
Iacoviello, Matteo (2005) House prices, borrowing constraints, and monetary policy in the business cycle. American Economic Review 95 (3), 739–764.10.1257/0002828054201477Google Scholar
Imrohoroglu, Selahattin (1998) A quantitative analysis of capital income taxation. International Economic Review 39 (2), 307–328.10.2307/2527295Google Scholar
Itskhoki, Oleg and Moll, Benjamin (2014) Optimal Development Policies with Financial Frictions. NBER working paper no. 19994Google Scholar
Jermann, Urban and Quadrini, Vincenzo (2012) Macroeconomic effects of financial shocks. American Economic Review 102 (1), 238–271.10.1257/aer.102.1.238Google Scholar
Judd, Kenneth L. (1985) Redistributive taxation in a simple perfect foresight model. Journal of Public Economics 28 (1), 59–83.10.1016/0047-2727(85)90020-9Google Scholar
Kiyotaki, Nobuhiro and Moore, John (1997) Credit cycles. Journal of Political Economy 105 (2), 211–248.10.1086/262072Google Scholar
Kydland, Finn E. and Prescott, Edward C. (1980) Dynamic optimal taxation, rational expectations and optimal control. Journal of Economic Dynamics and Control 2 (1), 79–91.10.1016/0165-1889(80)90052-4Google Scholar
Lucas, R. E. (1987) Models of Business Cycles. Oxford: Basil Blackwell.Google Scholar
Lucas, Robert Jr. and Stokey, Nancy L. (1983) Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12 (1), 55–93.10.1016/0304-3932(83)90049-1Google Scholar
Marcet, Albert and Marimon, Ramon (2011) Recursive Contracts. Economics working papers ECO2011/15, European University Institute.Google Scholar
Monacelli, Tommaso (2008) Optimal monetary policy with collateralized household debt and borrowing constraints. In Campbell, J. (ed.), Asset Prices and Monetary Policy, pp. 103–146. Chicago: University of Chicago Press.10.7208/chicago/9780226092126.003.0004Google Scholar
Park, Yena (2014) Optimal taxation in a limited commitment economy. Review of Economic Studies 81 (2), 884–918.10.1093/restud/rdt038Google Scholar
Perri, Fabrizio and Quadrini, Vincenzo (2011) International Recessions. NBER working papers 17201, National Bureau of Economic Research, Inc.Google Scholar
Reis, Catarina (2012) Social discounting and incentive compatible fiscal policy. Journal of Economic Theory 147 (6), 2469–2482.10.1016/j.jet.2012.09.001Google Scholar
Smets, Frank and Wouters, Rafael (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97 (3), 586–606.10.1257/aer.97.3.586Google Scholar