Credit crunches as markov equilibria

Costas Azariadis; Kyoung Jin Choi

doi:10.1016/j.jmacro.2013.09.009

Credit crunches as markov equilibria

Costas Azariadis
, Kyoung Jin Choi

Research output: Contribution to journal › Article › peer-review

1 Scopus citations

Abstract

We explain the large observed volatility of commercial and industrial loans as a Markov equilibrium of an economy with limited commitment in which all credit is unsecured and self-enforcing. Aggregate income growth shocks affect gains from future asset market trading, inducing fluctuations in credit limits. The economy alternates between a high state of well diversified idiosyncratic risks and a "credit crunch" state of low debt limits and poor diversification.

Original language	English
Pages (from-to)	2-11
Number of pages	10
Journal	Journal of Macroeconomics
Volume	38
Issue number	PA
DOIs	https://doi.org/10.1016/j.jmacro.2013.09.009
State	Published - Dec 2013

Keywords

Credit crunch
Financial panics
Unsecured lending

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10.1016/j.jmacro.2013.09.009

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AB - We explain the large observed volatility of commercial and industrial loans as a Markov equilibrium of an economy with limited commitment in which all credit is unsecured and self-enforcing. Aggregate income growth shocks affect gains from future asset market trading, inducing fluctuations in credit limits. The economy alternates between a high state of well diversified idiosyncratic risks and a "credit crunch" state of low debt limits and poor diversification.

KW - Credit crunch

KW - Financial panics

KW - Unsecured lending

UR - https://www.scopus.com/pages/publications/84888135180

U2 - 10.1016/j.jmacro.2013.09.009

DO - 10.1016/j.jmacro.2013.09.009

M3 - Article

AN - SCOPUS:84888135180

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VL - 38

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EP - 11

JO - Journal of Macroeconomics

JF - Journal of Macroeconomics

IS - PA

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Credit crunches as markov equilibria

Abstract

Keywords

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