Inefficient Asset Price Booms

63 Pages Posted: 6 Jan 2018 Last revised: 5 Dec 2019

See all articles by Daniel Neuhann

Daniel Neuhann

University of Texas at Austin, McCombs School of Business

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

Neuhann, Daniel, Inefficient Asset Price Booms (December 1, 2019). Available at SSRN: or

Daniel Neuhann (Contact Author)

University of Texas at Austin, McCombs School of Business ( email )

Austin, TX 78701
United States

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