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Author(s) / Editor(s): 
  • Julian A. Parra
  • Carmiña O. Vargas

Macroprudential vs. Ex-post Policy Interventions: when Domestic Taxes are Relevant for International Lenders

We argue that international lenders take into account that taxes (or subsidies) affect borrowers’ available income for debt repayments. Using an endowment-economy model, we show that by incorporating this fact into the analysis of …financial crises from the pecuniary externality perspective, ex-post interventions are completely ineffective to manage crises and, instead, ex-ante capital controls are useful for correcting the externality that stems from the underestimation of the social costs of decentralized debt decisions.

 

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Update 10:30 a.m., 03/05/2016

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