Credit Expansion and Credit Misallocation

38 Pages Posted: 18 Oct 2011 Last revised: 11 Sep 2018

See all articles by Alexander Bleck

Alexander Bleck

University of British Columbia - Sauder School of Business

Xuewen Liu

University of Hong Kong (HKU) - Finance Area, Faculty of Business and Economics

Date Written: April 1, 2014

Abstract

This paper develops a general equilibrium model to analyze the interaction between two sectors with differing degree of financial friction in the context of liquidity injections (credit expansion). We show that if too much liquidity is injected into the economy, overheating can build up in the sector with lower friction, crowding liquidity out of the sector with higher friction. The crowding-out manifests in a self-reinforcing spiral because of feedback between liquidity inflows, asset prices, and collateral values. The paper highlights the effect of financial frictions on the allocation and distribution of liquidity in an economy, demonstrating misallocation of liquidity (credit) in the economy under excessive liquidity injections.

Keywords: Corporate liquidity; Collateral values; Asset specificity; Speculation

JEL Classification: G01; G21; G33; E58

Suggested Citation

Bleck, Alexander and Liu, Xuewen, Credit Expansion and Credit Misallocation (April 1, 2014). Journal of Monetary Economics, Vol. 94, 2018, Available at SSRN: https://ssrn.com/abstract=1945701 or http://dx.doi.org/10.2139/ssrn.1945701

Alexander Bleck

University of British Columbia - Sauder School of Business ( email )

Canada
604-827-3452 (Phone)

Xuewen Liu (Contact Author)

University of Hong Kong (HKU) - Finance Area, Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

HOME PAGE: http://web.hku.hk/~xuewenl/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
305
Abstract Views
1,730
rank
124,755
PlumX Metrics