Inefficient credit booms
By: Guido Lorenzoni
Contributors: National Bureau of Economic Research
Series: NBER working paper series -- working paper 13639; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 13639.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] /
Description: "This paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks.  In particular, it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post.  Even though, from a first-best perspective the equilibrium always displays under-borrowing, from a second-best point of view excessive borrowing can arise.  The inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market.  This generates a pecuniary externality that is not internalized in private contracts.  The model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 12/12/2007.

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