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Can a "credit crunch" be efficient?

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Author Info

  • Edward J. Green
  • Soo-Nam Oh

Abstract

Two observations have sometimes been viewed as evidence that the equilibrium allocations of intermediated credit markets are inefficient. First, low-income households' marginal propensity to consume is close to unity. Second, even high-income households seem to face nonprice constraints during recessions. This paper presents a model that possesses both of these features. (A recession is modeled as an economy in which the equilibrium level of investment is at its lowest possible level.) However, contrary to the conventional view, the equilibrium of this model is ex ante efficient. The model also sheds light on some historical episodes of credit restraint.

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Bibliographic Info

Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1991)
Issue (Month): Fall ()
Pages: 3-17

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Handle: RePEc:fip:fedmqr:y:1991:i:fall:p:3-17:n:v.15no.4

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Related research

Keywords: Credit;

References

References listed on IDEAS
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  1. Runkle, David E., 1991. "Liquidity constraints and the permanent-income hypothesis : Evidence from panel data," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 73-98, February.
  2. Christiano, Lawrence J & Eichenbaum, Martin & Marshall, David, 1991. "The Permanent Income Hypothesis Revisited," Econometrica, Econometric Society, vol. 59(2), pages 397-423, March.
  3. Edward J. Green & Soo-Nam Oh, 1991. "Contracts, constraints, and consumption," Staff Report 143, Federal Reserve Bank of Minneapolis.
  4. Falk, Barry L. & Lee, Bong-Soo, 1990. "Time Series Implications of Friedman's Permanent Income Hypothesis," Staff General Research Papers 11094, Iowa State University, Department of Economics.
  5. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
  6. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  7. Boyd, J.h. & Smith, B.D., 1991. "The Equilibrium Allocation of Investment Capital in the Presence of Adverse Selection and Costly State Verification," RCER Working Papers 289, University of Rochester - Center for Economic Research (RCER).
  8. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  9. Keane, Michael P & Runkle, David E, 1992. "On the Estimation of Panel-Data Models with Serial Correlation When Instruments Are Not Strictly Exogenous," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 1-9, January.
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Citations

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Cited by:
  1. Mingwei Yuan & Christian Zimmermann, 1999. "Credit Crunch, Bank Lending and Monetary Policy: A Model of Financial Intermediation with Heterogeneous Projects," Cahiers de recherche CREFE / CREFE Working Papers 89, CREFE, Université du Québec à Montréal.
  2. David Backus & Silverio Foresi & Liuren Wu, 2002. "Contagion in Financial Markets," Finance 0207009, EconWPA.
  3. Mingwei Yuan & Christian Zimmermann, 2000. "Financial Intermediation with Heterogeneous Projects: An Application to the Japanese Credit Crunch," Cahiers de recherche CREFE / CREFE Working Papers 115, CREFE, Université du Québec à Montréal.
  4. Mingwei Yuan & Christian Zimmermann, 1999. "Credit Crunch in a Model of Financial Intermediation and Occupational Choice," Cahiers de recherche CREFE / CREFE Working Papers 97, CREFE, Université du Québec à Montréal.

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