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We would like to thank: Rahul Anand, Vivek Arora, Chikako Baba, Paul Levine, Diana Lima, Ola Melander, Raffaele Rossi, Sarah Sanya and the seminar participants at the Asia-Pacific Department of the International Monetary Fund and at the Central Bank of Philippines. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.
See Maino and Barnett (2013).
See Craig, Davis, and Pascual (2006) for evidence on the procyclicality of Asian financial markets.
See the Asian Pacific Regional Economic Outlook (APD-REO henceforth) of April 2011.
Conceptually, the real cost of equity (i.e., the implied rate of return required by investors) is equal to the sum of the risk-free interest rate and the equity risk premium. At a time of capital inflows, the relative appeal of capital investment increases, making it easier for firms to borrow from banks based on their greater net worth
Thus we can interpret
The penality is then collected by the government. However, given the non distortionary nature of this tax it leaves the remaining of the model unaffected.
Following Unsal (2011) we set the Taylor rule coefficient for credit growth at 0.5.
See Schmitt-Grohe and Uribe (2007) and Faia and Monacelli (2007) for a detailed discussion of the methodology.