Unsecured credit markets are not insurance markets

Rational inattention and the dynamics of consumption and wealth in general equilibrium

“…We find that if attention is elastic (i.e., consumers can adjust the degree of attention in response to changes in the real world), the EIS plays an important role in affecting the equilibrium properties of the model economy. 5 In particular, we show that an increase in EIS affects the equilibrium interest rate through two channels: (i) it increases the relative importance of the impatience-induced dissaving effect (the direct channel) and (ii) it reduces the optimal attention level and thus increases the inattention-induced precautionary saving amount (the indirect channel). In addition, the optimal level of attention in our RU model is mainly determined by the EIS, and is independent of the degree of risk aversion.…”

“…Introducing RI would then be substantially more difficult and involve approximations of unknown quality. 5 Coibion and Gorodnichenko (2015) find that information rigidities were falling from the late 1960s to the early 1980s as the volatility of macroeconomic variables was rising, while these rigidities had been consistently increasing since the start of the Great Moderation (1983 − 1984). They then argue that one should be careful when treating information rigidities at the macro level as a structural parameter because these rigidities vary over time in response to changes in macroeconomic conditions.…”

Consumer default with complete markets: default-based pricing and finite punishment

“…This includes Zhang (1997), Mateos-Planas and Seccia (2006),Ábrahám and Cárceles-Poveda (2010), Andolfatto andGervais (2008), andWang (2011). This paper is also related to the recent quantitative literature on consumer credit and bankruptcy. The works that undertake a quantitative general equilibrium analysis of incomplete markets include Chatterjee, Corbae, Nakajima, and Ríos-Rull (2007), and Livshits, MacGee, and Tertilt (2007), Mateos-Planas (2013), Mateos-Planas and Ríos-Rull (2013), Mateos-Planas (2011), andAthreya, Tam, andYoung (2009). The present paper deals in a similar way with the pricing of default but does not rule out trade opportunities arbitrarily by restricting the set of assets available.…”

Loan Guarantees for Consumer Credit Markets

“…This is because even when a loan guarantee program is nominally targeted at a secured form of lending, such as mortgage loan guarantees, they can only alter allocations because there is a positive probability of the loan becoming at least partially unsecured, ex-post. That is, the value of the guarantee 4 Relatedly, although beyond the scope of our inquiry, it should be noted that loan guarantees are often seen as a viable and essential part of macroeconomic/financial public policy remedies to get credit markets "unstuck" in crises. Prominent efforts include the Emergency Loan Guarantee Act of 1971, and more recently the guarantees offerred by Federal Reserve System to member banks to allow the latter continued access to relatively inexpensive wholesale funding.…”

“…Therefore, to the extent that the unsecured market is the one most relevant for improving the consumption smoothing efforts of a nontrivial group of US households, the provision of guaranteed loans to this sector appears, a priori, likely to be consequential. 4 While we focus our quantitative analysis on consumer credit markets where only intangible collateral arising from the perception of reputational costs or changes in future credit terms is "posted," our approach applies to credit markets where more tangible forms of collateral are pledged. This is because even when a loan guarantee program is nominally targeted at a secured form of lending, such as mortgage loan guarantees, they can only alter allocations because there is a positive probability of the loan becoming at least partially unsecured, ex-post.…”