Managing markets for toxic assets

Christopher L. House and Yusufcan Masatlioglu

Journal of Monetary Economics, 2015, vol. 70, issue C, 84-99

Abstract: A model in which banks trade toxic assets to raise funds for investment is analyzed. Toxic assets generate an adverse selection problem and, consequently, the interbank asset market provides insufficient liquidity. Investment is inefficiently low because acquiring funding requires banks to sell high-quality assets for less than their “fair” value. Equity injections reduce liquidity and may be counterproductive as a policy for increasing investment. Paradoxically, if it is directed to firms with the greatest liquidity needs, an equity injection will reduce investment further. Asset purchase programs, like the Public–Private Investment Program, often have favorable impacts on liquidity, investment and welfare.

Keywords: Liquidity; Adverse selection; TARP (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Managing Markets for Toxic Assets (2010)
Working Paper: Managing Markets for Toxic Assets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:70:y:2015:i:c:p:84-99

DOI: 10.1016/j.jmoneco.2014.10.001

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