Uncertain booms and fragility

Michael Lee

No 861, Staff Reports from Federal Reserve Bank of New York

Abstract: I develop a framework of the buildup and outbreak of financial crises in an asymmetric information setting. In equilibrium, two distinct economic states arise endogenously: ?normal times,? periods of modest investment, and ?booms,? periods of expansionary investment. Normal times occur when the intermediary sector realizes moderate investment opportunities. Booms occur when the intermediary sector realizes many investment opportunities, but also occur when it realizes very few opportunities. As a result, investors face greater uncertainty in booms. During a boom, subsequent arrival of negative information about an intermediary asset results in large downward shifts in investors? confidence about the underlying quality of long-term assets. A crisis of confidence ensues. Investors collectively force costly early liquidation of the intermediated assets and move capital to safe assets, in a flight-to-quality episode.

Keywords: financial crises; financial intermediation; asymmetric information; booms; financial fragility (search for similar items in EconPapers)
JEL-codes: D82 E02 G01 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2018-07-23
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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