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The Perils of Credit Booms
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TOPIC:
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The Perils of Credit Booms
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ABSTRACT
Credit booms often cause economic expansions. But some credit booms end in financial crises and others do not. This paper presents a dynamic macroeconomic model with adverse selection in the financial market to address this issue. Entrepreneurs can take short-term collateralized debt and trade long-term assets to finance investment. Funding liquidity can erode market liquidity. High funding liquidity discourages firms from selling their good long-term assets since these good assets have to subsidize lemons when there is information asymmetry. This can cause a liquidity dry-up in the market for long-term assets and even a market breakdown, resulting in a financial crisis. Multiple equilibria can coexist. Credit booms combined with changes in beliefs can cause equilibrium regime shifts, leading to an economic crisis or expansion.
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Presenter
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Research Fields
Macroeconomics, Monetary and Financial Economics, Chinese Economy
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Date:
20 Nov 2015 (Friday)
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Time:
4pm - 5.30pm
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Venue:
Meeting Room 5.1, Level 5
School of Economics
Singapore Management University
90 Stamford Road
Singapore 178903
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