Discussion paper

DP13816 (Macro) Prudential Taxation of Good News

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.


Piguillem, F, J Flemming and J L'Huillier (2019), ‘DP13816 (Macro) Prudential Taxation of Good News‘, CEPR Discussion Paper No. 13816. CEPR Press, Paris & London. https://cepr.org/publications/dp13816