Overborrowing, financial crises and 'macro-prudential' taxes
By: Javier Bianchi, Enrique G. Mendoza
Contributors: Mendoza, Enrique G., 1963-; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16091; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16091.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "We study overborrowing and financial crises in an equilibrium model of business cycles and asset prices with collateral constraints.  Private agents in a decentralized competitive equilibrium do not internalize the effects of their individual borrowing plans on the market price of assets at which collateral is valued and on the wage costs relevant for working capital financing.  Compared with a constrained social planner who internalizes these effects, they undervalue the benefits of an increase in net worth when the constraint binds and hence they borrow "too much" ex ante.  Quantitatively, average debt and leverage ratios are only slightly larger in the competitive equilibrium, but the incidence and magnitude of financial crises is much larger.  Excess asset returns, Sharpe ratios and the market price of risk are also much larger.  A state-contingent tax on debt of about 1 percent on average supports the planner's allocations as a competitive equilibrium and increases social welfare"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/8/2010.

Includes bibliographical references.

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