Inefficient Credit Booms

Lorenzoni, Guido

doi:10.3386/w13639

Cited by 313 publications

(459 citation statements)

References 49 publications

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“…12 Figure 2 illustrates a possible form of these functions and their zeros in the simple case where there are two possible shocks, s = 1, 2. By equations (24) and (27), for each (s, λ) ∈ S × (0, 1) we must have L(s, λ) = λ or L(s, λ) ∈ {λ * (s), λ * (s)}. To see this note that if V h (s, λ) > 0 for h = 1, 2 then L(s, λ) = λ while if V 1 (s, λ) < 0, Equation (27) implies that λ must "jump" to λ * (s), and if V 2 (s, λ) < 0 it implies that λ must jump to λ * (s).…”

Section: Finite Support Markov Equilibria In Economies With Two Typesmentioning

confidence: 99%

“…By equations (24) and (27), for each (s, λ) ∈ S × (0, 1) we must have L(s, λ) = λ or L(s, λ) ∈ {λ * (s), λ * (s)}. To see this note that if V h (s, λ) > 0 for h = 1, 2 then L(s, λ) = λ while if V 1 (s, λ) < 0, Equation (27) implies that λ must "jump" to λ * (s), and if V 2 (s, λ) < 0 it implies that λ must jump to λ * (s). If V h (s, λ) = 0 for some h = 1, 2 we must have λ ∈ {λ * (s), λ * (s)} and since we assumed that there is a unique zero…”

Section: Finite Support Markov Equilibria In Economies With Two Typesmentioning

confidence: 99%

“…describes a transition function that ensures that V h (s, L(s, λ)) ≥ 0 for all λ ∈ {λ * (s), λ * (s), s = 1, ..., S} so that (24) holds and (27) holds. This constitutes a competitive equilibrium for economies with initial conditions in {λ * (s), λ * (s), s = 1, ..., S}.…”

Section: Finite Support Markov Equilibria In Economies With Two Typesmentioning

confidence: 99%

“…Cordoba (2008) considers an economy with production, no aggregate uncertainty, and a continuum of ex ante identical agents and derives sufficient conditions for Pareto-efficiency that are similar to ours. Lorenzoni (2008), Kilenthong and Townsend (2011), and Gromb and Vayanos (2002) also show that collateral constraints can lead to constrained inefficient equilibrium allocations. However, the analyses by Lorenzoni and by Kilenthong and Townsend are different as they consider a production economy where capital accumulation links different periods and the reallocation is induced by a change in the level of investment that modifies available resources.…”

Section: Introductionmentioning

confidence: 97%

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Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Gottardi

Kübler

2015

Review of Economic Studies

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In this article we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset pay-offs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow-Debreu markets subject to a series of limited pledgeability constraints. We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable. Abstract In this paper we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset payoffs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow-Debreu markets subject to a series of limited pledgeability constraints.We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off.We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable. * We thank seminar participants at various universities and conferences and in particular Arpad Abraham,

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Section: Finite Support Markov Equilibria In Economies With Two Typesmentioning

confidence: 99%

Section: Finite Support Markov Equilibria In Economies With Two Typesmentioning

confidence: 99%

Section: Finite Support Markov Equilibria In Economies With Two Typesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 97%

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Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Gottardi

Kübler

2015

Review of Economic Studies

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“…19 Measures of developments in real activity are included to control for the state of 15 Collateral constraints are also viewed as a source of "overborrowing" (see e.g. Lorenzoni (2008) and Bianchi (2011)).…”

Section: Economic Activitymentioning

confidence: 99%

Bubbles and Crises: The Role of House Prices and Credit

Anundsen

Gerdrup²,

Hansen³

et al. 2014

SSRN Journal

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Optimal liquidity policy with shadow banking

Grochulski

Zhang

2018

Econ Theory

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We study the impact of shadow banking on optimal liquidity regulation in a Diamond-Dybvig maturity-mismatch environment. In this economy, a pecuniary externality arising out of the banks' access to private retrade renders competitive equilibrium inefficient. A tax on illiquid assets and a subsidy to the liquid asset similar to the payment of interest on reserves (IOR) constitute an optimal liquidity regulation policy. Shadow banking gives banks an outside option allowing them to escape regulation at the cost of forgoing access to the government safety net. We derive two implications of shadow banking for optimal liquidity regulation policy. First, optimal policy must implement a macroprudential cap on illiquid-asset prices that binds only when the return on illiquid assets is high. Second, optimal policy must implement a fire sale of illiquid assets when high demand for liquidity is anticipated. We show how these features can be implemented by adjusting the IOR rate and the illiquid-asset tax rate. KeywordsMaturity mismatch • Shadow banking • Mechanism design • Pecuniary externality • Private retrade • Liquidity regulation • Interest on reserves • Illiquid-asset tax JEL Classification G21 • G23 • E58 B Borys Grochulski

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Inefficient Credit Booms

Cited by 313 publications

References 49 publications

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Bubbles and Crises: The Role of House Prices and Credit

Optimal liquidity policy with shadow banking

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