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Analysis of macro‐prudential and ex post financial crisis interventions: Relevance of the fiscal‐policy setup
Author(s) -
Vargas Carmiña O.,
ParraPolania Julian A.
Publication year - 2021
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1985
Subject(s) - economics , subsidy , financial crisis , debt , fiscal policy , externality , macro , constraint (computer aided design) , ex ante , macroeconomics , monetary economics , microeconomics , mechanical engineering , computer science , engineering , market economy , programming language
In the analysis of financial crises from the pecuniary externality perspective, it is common to assume that (a) lenders overlook the effect of lump‐sum taxes/subsidies on borrowers' debt repayment capacity and (b) there is a balanced‐budget fiscal policy. By modifying the first assumption (i.e., the financial constraint) we find a significant result for the debate on ex‐ante vs. ex post crisis interventions: the latter could be completely ineffective to manage crises and, instead, macro‐prudential policies are still able to correct the externality that stems from the underestimation of the social costs of decentralized debt decisions. By modifying both assumptions (i.e., with the modified financial constraint and counter‐cyclical fiscal policy) we find that some combinations of policy interventions could completely avoid crises, but under restrictive conditions.