Breaking the Spell with Credit-Easing: Self-Confirming Credit Crises in Competitive Search Economies

Ramon Marimon
Authors registered in the RePEc Author Service: Gaetano Gaballo

No 11135, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We show that credit crises can be Self-Confirming Equilibria (SCE), which provides a new rationale for policy interventions like, for example, the FRB’s TALF credit-easing program in 2009. We introduce SCE in competitive credit markets with directed search. These markets are efficient when lenders have correct beliefs about borrowers’ reactions to their offers. Nevertheless, credit crises - where high interest rates self-confirm high credit risk - can arise when lenders have correct beliefs only locally around equilibrium outcomes. Policy is needed because competition deters the socially optimal degree of information acquisition via individual experiments at low interest rates. A policy maker with the same beliefs as lenders will find it optimal to implement a targeted subsidy to induce low interest rates and, as a by-product, generate new information for the market. We provide evidence that the 2009 TALF was an example of such Credit Easing policy. We collect new micro-data on the ABS auto loans in the US before and after the policy intervention, and we test, successfully, our theory in this case.

Keywords: Unconventional policies; Learning; Credit crisis; Social experimentation; Self-confirming equilibrium; Directed search (search for similar items in EconPapers)
JEL-codes: D53 D83 D84 D92 E44 E61 G01 G20 J64 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-ban, nep-cta and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP11135 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Breaking the spell with credit-easing: Self-confirming credit crises in competitive search economies (2021)
Working Paper: Breaking the spell with credit-easing: self-confirming credit crises in competitive search economies (2016)
Working Paper: Breaking the Spell with Credit-Easing: Self-Confirming Credit Crises in Competitive Search Economies (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:11135

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP11135

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().