Hoarding international reserves versus a Pigovian tax-cum-subsidy scheme: Reflections on the deleveraging crisis of 2008-2009, and a cost benefit analysis

Joshua Aizenman

Research output: Contribution to journalArticlepeer-review

14 Scopus citations

Abstract

We outline the case for supporting self-insurance by imposing a tax on external borrowing in a model of an emerging market. Entrepreneurs finance tangible investments via bank intermediation of foreign borrowing, exposing the economy to negative fire-sale externalities at times of deleveraging; a risk that increases with the ratio of aggregate external borrowing to international reserves. Price taking economic agents ignore their marginal impact on the expected cost of a deleveraging crisis. The optimal borrowing tax reduces the distorted activity, external borrowing, and induces borrowers to co-finance the precautionary hoarding of international reserves.

Original languageEnglish
Pages (from-to)1502-1513
Number of pages12
JournalJournal of Economic Dynamics and Control
Volume35
Issue number9
DOIs
StatePublished - 1 Sep 2011
Externally publishedYes

Keywords

  • Deleveraging
  • Fire-sale congestion externality
  • International reserves
  • Tax-cum-subsidy

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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