Relevance of the fiscal-policy setup in the analysis of macroprudential and ex-post financial crisis interventions
The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.
In a previous paper (Parra-Polania and Vargas, 2015) we modify the financial constraint of a very standard model to incorporate the fact that international lenders take into account that taxes (or subsidies) affect borrowers’ income available for debt repayments, and find that ex-post interventions are completely ineffective to manage crises (even though they are financed by taxes that do not entail further distortions) and, instead, macroprudential policies are still able to correct the underestimation of the social costs of decentralized debt decisions. These results are obtained under the assumption, also common in the related literature, that there is a balanced-budget fiscal policy. In this paper we extend our previous work to consider countercyclical fiscal policies (keeping the alternative financial constraint). We show that some combination of policy interventions could completely avoid crises, but under restrictive conditions.
The series Borradores de Economía is published by the Economic Studies Department at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.
