Economics at your fingertips  

Forbearance Impedes Confidence Recovery (Revised)

Keiichiro Kobayashi

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: This paper is a revised version of DP02-E-005, where the mathematical structure of the model in this paper is substantially different from the previous one. The finding that countries that take a slow approach to reform during a financial crisis run into problems of persistent stagnation is usually explained as follows: Forbearance policy (i.e., an implicit subsidy to inefficient sectors) distorts resource allocation, causing a supply shortage of resources to the productive sectors. I propose another explanation: Forbearance impedes the recovery of confidence that is lost during a financial crisis. If confidence is restored through Bayesian learning by economic agents based on observations of government actions, then the inaction of the government (forbearance) impedes Bayesian learning. The model shows that forbearance policy delays economic recovery. (forthcoming in Journal of Macroeconomics)

Pages: 18 pages
Date: 2005-02
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (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:

Access Statistics for this paper

More papers in Discussion papers from Research Institute of Economy, Trade and Industry (RIETI) Contact information at EDIRC.
Bibliographic data for series maintained by TANIMOTO, Toko ().

Page updated 2020-06-18
Handle: RePEc:eti:dpaper:05002