ON OPTIMAL CREDIT EXPANSION

Kanak Patel and Kirill Zavodov

ERES from European Real Estate Society (ERES)

Abstract: We derive a model of lending under imperfect information for investments with embedded real and financial flexibility. Risk-shifting is shown to be not inherent in loan agreements. Under certain assumptions, there exists an optimal credit expansion policy that fulfils the dual objective of stimulating investment and preventing risk shifting behaviour. Its existence helps in explaining why less volatile countries have a higher growth rate. More importantly, it suggests that a policy response of raising interest is not only impotent but it actually exacerbates speculative investments that cause credit-induced asset-price bubbles. Instead, a policy of de creasing interest rates with simultaneous tightening of lending requirements is a more effective tool for dealing with the damaging consequences of speculative investments.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2010-01-01
References: Add references at CitEc
Citations:

Downloads: (external link)
https://eres.architexturez.net/doc/oai-eres-id-eres2010-422 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arz:wpaper:eres2010_422

Access Statistics for this paper

More papers in ERES from European Real Estate Society (ERES) Contact information at EDIRC.
Bibliographic data for series maintained by Architexturez Imprints ().