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Credit expansion and credit misallocation

Alexander Bleck and Xuewen Liu

Journal of Monetary Economics, 2018, vol. 94, issue C, 27-40

Abstract: We develop a general equilibrium model to analyze the interaction between two sectors with differing degree of financial friction in the context of liquidity injections (credit expansion). We show that excessive liquidity injection can overheat the sector with lower friction, crowding liquidity out of the sector with higher friction. The crowding-out manifests in a self-reinforcing spiral because of feedback between liquidity inflows, asset prices, and collateral values. The paper highlights the effect of financial frictions on the allocation and distribution of liquidity in an economy, demonstrating misallocation of liquidity (credit) under excessive liquidity injection.

Keywords: Corporate liquidity; Collateral values; Asset specificity; Speculation; Financial intermediaries (search for similar items in EconPapers)
JEL-codes: G01 G21 G33 E58 (search for similar items in EconPapers)
Date: 2018
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