Adverse Selection and the Accelerator

Christopher House ()

Macroeconomics from EconWPA

Abstract: This paper reexamines the relationship between financial market imperfections and economic instability. I present a model in which financial accelerator effects come from adverse selection in credit markets. Unlike other models of the financial accelerator, the model I present has the potential to stabilize the economy rather than destabilize it. The stabilizing forces in the dynamic model are closely related to forces that cause overinvestment in static models. Consequently, the stabilizing properties of the model are not specific to adverse selection but rather are present in any environment in which credit market distortions cause overinvestment. When investment projects are equity financed, or when contracts are written optimally, the only equilibria that emerge are stabilizer equilibria. Thus, stabilizing outcomes are more robust in this model. Finally, the empirical distinction between accelerator equilibria and stabilizer equilibria is subtle. Many statistics used to test for financial accelerators are observationally equivalent in stabilizer equilibria.

Keywords: subliminal; extant; Smith; economagic; gmm (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: 2002-11-22
Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on HP; pages: 38 ; figures: included
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0211015

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