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Title: (Macro) Prudential Taxation of Good News

Author(s): Jean Flemming, Jean-Paul L'Huillier and Facundo Piguillem

Publication Date: June 2019

Keyword(s): financial crises, macroprudential policy and Pecuniary externality

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: We analyze the optimal macroprudential policy under the presence of news shocks. News are shocks to the growth rate that convey information about future growth. In this context, crises are characterized by long periods with positive shocks (and good news) that eventually revert,rendering the collateral constraint binding and triggering deleveraging. In this environment it is optimal to tax borrowing during good times, and let agents act freely leaving the allocations undistorted, including borrowing and lending, when the economy reverts to a bad state. We contrast our findings to the case of standard, shocks to the level of income, where it is optimal to tax debt in bad times, when agents need to borrow the most for precautionary savings motives. Also, taxes are used much less often and are around one-tenth of those under level shocks.

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Bibliographic Reference

Flemming, J, L'Huillier, J and Piguillem, F. 2019. '(Macro) Prudential Taxation of Good News'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13816