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Investment externalities in models of fire sales

Pablo Kurlat

Journal of Monetary Economics, 2021, vol. 122, issue C, 102-118

Abstract: Two alternative models of fire sales that yield the same aggregate predictions have different normative implications. If fire sales result from marginal misallocation, a pecuniary externality leads to ex-ante overinvestment. If they result from asymmetric information, the overinvestment result is reversed. However, there may be a tradeoff between present and future underinvestment. Ex-ante macroprudential policy may need to treat different types of investment differently, but ex-post intervention is useful in both cases.

Keywords: Fire sales; Pecuniary externality; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D62 D82 G14 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jmoneco.2021.07.005

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