Self-Fulfilling Credit-Market Freezes
42 Pages Posted: 17 Mar 2010 Last revised: 26 Dec 2010
There are 3 versions of this paper
Self-Fulfilling Credit Market Freezes
Self-Fulfilling Credit-Market Freezes
Self-Fulfilling Credit Market Freezes
Date Written: December 1, 2009
Abstract
This paper develops a model of a self-fulfilling credit market freeze and uses it to study alternative governmental responses to such a crisis. We study an economy in which operating firms are interdependent, with their success depending on the ability of other operating firms to obtain financing. In such an economy, inefficient credit market freeze may arise in which banks abstain from lending to operating firms with good projects because of their self-fulfilling expectations that other banks will not be lending. Our model enables us to study the effectiveness of alternative measures for getting an economy out of an inefficient credit market freeze. In particular, we study the effectiveness of interest rate cuts, infusion of capital into financial institutions, direct lending to operating firms by the government, and infusion of capital into financial firms under lending commitment.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Self-Fulfilling Credit Market Freezes
By Lucian A. Bebchuk and Itay Goldstein
-
Strategic Complementarity, Fragility, and Regulation
By Xavier Vives
-
Strategic Complementarity, Fragility, and Regulation
By Xavier Vives
-
Strategic Complementarity, Fragility, and Regulation
By Xavier Vives
-
International Capital Flows and Credit Market Imperfections: A Tale of Two Frictions
By Alberto Martin and Filippo Taddei
-
Three Branches of Theories of Financial Crises
By Itay Goldstein and Assaf Razin
-
Financial Services Trade After the Crisis: Policy and Legal Conjectures
By Panos Delimatsis and Pierre Sauvé