Hardman-Moore, John

English

This paper is a contribution to the growing literature on constrained inefficiencies in economies with financial frictions. The purpose is to present two simple examples, inspired by the stochastic models in Gersbach-Rochet (2012) and Lorenzoni (2008), of deterministic environments in which such inefficiencies arise through credit constraints. Common to both examples is a pecuniary externality, which operates through an asset price. In the second example, a simple transfer between two groups of agents can bring about a Pareto improvement. In a first best economy, there are no pecuniary externalities because marginal productivities are equalised. But when agents face credit constraints, there is a wedge between their marginal productivities and those of the non-credit-constrained agents. The wedge is the source of the pecuniary externality: economies with these kinds of imperfections in credit markets are not second-best efficient. This is akin to the constrained inefficiency of an economy with incomplete markets, as in Geanakoplos and Polemarchakis (1986). <br/

Edinburgh Research Explorer

Dissecting Fire Sales Externalities,

Excessive Dollar Borrowing: Financial Development and Underinsurance,

Existence, Regularity, and Constrained Suboptimality of Competitive Allocations when the Asset Market Is Incomplete,

Inefficient Investment Waves,

Macroprudential Regulation versus Mopping Up After the Crash, NBER Working Paper w18675.

Managing Credit Booms and Busts: A Pigouvian Taxation Approach, NBER Working Paper w16377.

Overborrowing and Systemic Externalities in the Business Cycle,

Overborrowing, Financial Crises, and `Macroprudential' Taxes, NBER Working Paper w16091.

Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses, ECB Working Paper 1345.

Pecuniary Externality through Credit Constraints: Two Examples without Uncertainty

Pecuniary Externality through Credit Constraints: Two Examples without Uncertainty

Abstract

Similar works

Full text

Available Versions

Edinburgh Research Explorer