Credit crunches as markov equilibria

Costas Azariadis and Kyoung Jin Choi

Journal of Macroeconomics, 2013, vol. 38, issue PA, 2-11

Abstract: We explain the large observed volatility of commercial and industrial loans as a Markov equilibrium of an economy with limited commitment in which all credit is unsecured and self-enforcing. Aggregate income growth shocks affect gains from future asset market trading, inducing fluctuations in credit limits. The economy alternates between a high state of well diversified idiosyncratic risks and a “credit crunch” state of low debt limits and poor diversification.

Keywords: Credit crunch; Unsecured lending; Financial panics (search for similar items in EconPapers)
JEL-codes: E32 E4 G01 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:38:y:2013:i:pa:p:2-11

DOI: 10.1016/j.jmacro.2013.09.009

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