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Credit crunches as markov equilibria

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  • Azariadis, Costas
  • Choi, Kyoung Jin
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    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 38 (2013)
    Issue (Month): PA ()
    Pages: 2-11

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    Handle: RePEc:eee:jmacro:v:38:y:2013:i:pa:p:2-11

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    Web page: http://www.elsevier.com/locate/inca/622617

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    Keywords: Credit crunch; Unsecured lending; Financial panics;

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    12. Herrera, Ana Maria & Kolar, Marek & Minetti, Raoul, 2011. "Credit reallocation," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 551-563.
    13. Nobuhiro Kiyotaki & John Moore, 2004. "Liquidity, Bussiness Cycles and Monetary Policy," ESE Discussion Papers 113, Edinburgh School of Economics, University of Edinburgh.
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