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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

Abstract: 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.

Date: 2016
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: Adverse selection and self-fulfilling business cycles (2018) Downloads
Working Paper: Adverse Selection and Self-fulfilling Business Cycles (2014) Downloads
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