Financial regulation, interest rate responses, and distributive effects

Arbeitspapier

This paper examines financial regulation and distortionary taxes in a heterogeneous-agents economy with pecuniary externalities induced by a collateral constraint. Limiting the loan-to-value ratio benefits only few unconstrained borrowers and reduces ex-ante social welfare. A Pigouvianstyle symmetric debt tax (that subsidizes savings) raises collateral prices and lowers interest rates, which stimulates borrowing and generates welfare gains for almost all income groups. A Pigouvian-style asset subsidy induces a wealth appreciation, while an asset tax particularly benefits lowwealth borrowers and enhances social welfare. Overall, collateral effects are of minor importance and interest rate rather than asset price responses are decisive for welfare effects.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECONtribute Discussion Paper ; No. 143

Classification and Topics

• Classification: Wirtschaft ; Personal Income, Wealth, and Their Distributions ; Financial Markets and the Macroeconomy ; Financial Institutions and Services: Government Policy and Regulation ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
• Subject: Financial regulation ; heterogeneous agents ; collateral constraint ; pecuniary externalities

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Loenser, Christian ; Röttger, Joost ; Schabert, Andreas
• Event: Veröffentlichung
• (who): University of Bonn and University of Cologne, Reinhard Selten Institute (RSI)
• (where): Bonn and Cologne
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/252304
• Last update: 10.03.2025, 11:42 AM CET