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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/.
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Abstract

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

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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

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