Corporate Debt and Capital Controls

This paper analyses an alternative setting with risk of default in which decisions of households and firms on domestic and international borrowing and lending are separated. We study an economy in which only firms can... [ view full abstract ]

This paper analyses an alternative setting with risk of default in which decisions of households and firms on domestic and international borrowing and lending are separated. We study an economy in which only firms can participate in international financial markets as well as in domestic credit markets. Default decision are then taken by firms (not the government) which will  repay its debt only as the value of the firm integrated to international  capital markets is higher than  its value of reverting to autarky at some cost. We derive an optimal financial-dividend policy of the firms that decentralize constrained efficient allocations in a framework in which firms can issued corporate bonds of different maturities. Then, we investigate as the implementation of capital controls can provide the right set of incentives to firms to decentralize constrained efficient allocations. That is, we ask how this class of model with risk of default can rationalize macroprudential policies. Finally, we quantitatively investigate some properties of optimal capital controls in two dimensions: how optimal taxes must be  conducted over the business cycle and how optimal taxes must be set on debt of different maturities.