Toxic Assets and Market Freezes
Chao Gu (),
Guido Menzio (),
Randall Wright and
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Randall Wright: Zhejiang University, University of Wisconsin and Dale Mortensen Center at Aarhus
No 2001, Working Papers from Department of Economics, University of Missouri
We study economies where some assets are toxic Â–i.e., they have negative returns Â–but still have positive prices because they provide liquidity as payment instruments or as collateral. Even without changes in fundamentals markets can, as a self-fulfiÂ…lling prophecy, freeze and thaw recurrently: toxic assets stop trading for a spell, then restart. We show markets without toxic assets might have hot and cold spells, where prices and quantities Â‡fluctuate, but cannot freeze and thaw (at least without nonconvexities). Freezes can occur when there are toxic assets plus fiÂ…at currency, and whether these assets trade for goods or trade for money.
Keywords: toxic assets; market freezes; negative returns; liquidity (search for similar items in EconPapers)
JEL-codes: E30 E44 E52 G14 D53 D83 (search for similar items in EconPapers)
Pages: 33 pages
New Economics Papers: this item is included in nep-mac and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:umc:wpaper:2001
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