Adverse Selection and Self-fulfilling Business Cycles
Pengfei Wang (),
Feng Dong and
Jess Benhabib ()
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Feng Dong: Shanghai Jiao Tong University
No 1526, 2016 Meeting Papers from Society for Economic Dynamics
We develop a macroeconomic model with adverse selection in credit markets. A continuum of final-goods producers borrow from financial intermediary to purchase intermediate goods as input. The type of producers as borrower is private information. Adverse selection arises here. Higher aggregate supply of credit induces more high-quality borrowers, lowers default risks face by each financial intermediary, and stimulate more individual credit supply. We show that this lending externality can generate multiple equilibria or indeterminacy even when the steady state equilibrium is unique, making self-fulfilling expectation driven business cycles possible.
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Journal Article: Adverse selection and self-fulfilling business cycles (2018)
Working Paper: Adverse Selection and Self-fulfilling Business Cycles (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1526
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