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Macroeconomic effects of secondary market trading

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  • Neuhann, Daniel

Abstract

This paper develops a theory of the credit cycle to account for recent evidence that capital is increasingly allocated to inefficiently risky projects over the course of the boom. The model features lenders who sell risk exposure to non-lender investors in order to relax borrowing constraints, but are tempted to produce and sell off bad assets when asset prices are sufficiently high. Asset prices gradually increase during the boom because non-lender wealth grows as their risk-taking pays off, triggering a fall in asset quality and precipitating an eventual crisis. I study the initial conditions that give rise to the credit cycle and consider policy implications. JEL Classification: G01, E32, E44

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  • Neuhann, Daniel, 2017. "Macroeconomic effects of secondary market trading," Working Paper Series 2039, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20172039
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    Cited by:

    1. Kurlat, Pablo, 2021. "Investment externalities in models of fire sales," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 102-118.
    2. Fukui, Masao, 2018. "Asset Quality Cycles," Journal of Monetary Economics, Elsevier, vol. 95(C), pages 97-108.
    3. Vladimir Asriyan & Victoria Vanasco, 2019. "Security design in non-exclusive markets with asymmetric information," Economics Working Papers 1712, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2021.
    4. Nicolas Caramp, 2021. "Sowing the Seeds of Financial Crises: Endogenous Asset Creation and Adverse Selection," Working Papers 342, University of California, Davis, Department of Economics.

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    More about this item

    Keywords

    credit booms; credit cycles; financial crisis; financial fragility; risk-taking channel of monetary policy; saving gluts; secondary markets; securitization;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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