Breaking the spell with credit-easing: Self-confirming credit crises in competitive search economies

Gaetano Gaballo and Ramon Marimon

Journal of Monetary Economics, 2021, vol. 119, issue C, 1-20

Abstract: In self-confirming crises lenders charge high interest rates wrongly believing that lower rates would generate losses. In a directed-search economy, misperceptions can persist because there is no equilibrium evidence that can confute it, preventing constrained-efficiency. A policy maker with the same beliefs as lenders will find it optimal to offer a contingent subsidy to induce lower market rates. As lenders price assets in response to this policy, new information may disprove misperceptions and restore efficiency. New micro-evidence suggests that the 2009 TALF intervention in the market of newly generated ABS was an example of the optimal policy in our model.

Keywords: Unconventional policies; Asset-backed securities (ABS); Term asset-backed securities lending facility (TALF) (search for similar items in EconPapers)
JEL-codes: D53 D83 D84 D92 E44 E61 G01 G20 J64 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
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)
Working Paper: Breaking the Spell with Credit-Easing: Self-Confirming Credit Crises in Competitive Search Economies (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:119:y:2021:i:c:p:1-20

DOI: 10.1016/j.jmoneco.2021.01.007

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