A new model shows how to tax borrowing to prevent the deepest recessions

Recessions are worse when they follow asset booms fueled by lots of debt. This paper shows that a specific tax on borrowing could make these recessions less frequent and less severe.

Economists have known that debt-fueled asset bubbles lead to worse economic crashes. This paper provides a concrete way for central banks to intervene, by showing how a small tax on borrowing can stabilize the system. It gives regulators a specific tool to use against the kind of financial excess that leads to the deepest downturns.