Inefficient Asset Price Booms
63 Pages Posted: 6 Jan 2018 Last revised: 5 Dec 2019
Date Written: December 1, 2019
Endogenous movements in the wealth distribution can generate asset price booms in which financial intermediaries increasingly engage in moral hazard and originate low-quality assets that are excessively exposed to aggregate risk. Central to the mechanism is a pecuniary externality whereby buyers of financial assets do not internalize that high asset prices harm origination incentives. Inefficient asset price booms occur only if risk-averse savers are sufficiently wealthy initially, and incentives decline only after a sufficiently long macroeconomic expansion. During the run-up, increasing asset prices instead allow for an efficient expansion of aggregate credit. I discuss implications for monetary policy and financial regulation.
Keywords: secondary markets, securitization, credit cycles, financial crisis, financial fragility, credit booms, saving gluts, risk-taking channel of monetary policy
JEL Classification: G01, E32, E44
Suggested Citation: Suggested Citation