Asset Price Booms and Macroeconomic Debt Overhang

Keiichiro Kobayashi

No 24-004E, CIGS Working Paper Series from The Canon Institute for Global Studies

Abstract: We propose a tractable model of financial crises to demonstrate that corporate debt restructuring can promote economic recovery. The model can replicate the following empirical regularities: Credit-fueled asset-price booms end up with collapses, followed by deep and persistent recessions with productivity declines. Risk-shifting firms amplify the booms and busts of asset prices by purchasing the assets by borrowed money. Resultant debt overhang lowers productivity and output by discouraging borrowing firms from expending additional efforts. This inefficiency is aggravated by the spillover effect in the monopolistic competition. Larger asset-price booms are followed by deeper and more persistent recessions. The ex-post government subsidy to lenders for implementing debt relief can improve the borrowers' productivity and increase the lenders' payoff and social welfare, without inducing time inconsistency.

Pages: 56
Date: 2024-09
New Economics Papers: this item is included in nep-dge and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cigs.canon/en/uploads/2024/09/24-004E_kobayashi_revised.pdf (application/pdf)

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:cnn:wpaper:24-004e

Access Statistics for this paper

More papers in CIGS Working Paper Series from The Canon Institute for Global Studies Contact information at EDIRC.
Bibliographic data for series maintained by The Canon Institute for Global Studies (web@canon-igs.org).