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Uncertain booms and fragility

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Abstract

I develop a framework of the buildup and outbreak of financial crises in an asymmetric information setting. In equilibrium, two distinct economic states arise endogenously: ?normal times,? periods of modest investment, and ?booms,? periods of expansionary investment. Normal times occur when the intermediary sector realizes moderate investment opportunities. Booms occur when the intermediary sector realizes many investment opportunities, but also occur when it realizes very few opportunities. As a result, investors face greater uncertainty in booms. During a boom, subsequent arrival of negative information about an intermediary asset results in large downward shifts in investors? confidence about the underlying quality of long-term assets. A crisis of confidence ensues. Investors collectively force costly early liquidation of the intermediated assets and move capital to safe assets, in a flight-to-quality episode.

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  • Michael Junho Lee, 2018. "Uncertain booms and fragility," Staff Reports 861, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:861
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    Cited by:

    1. Enrico Perotti & Magdelena Rola-Janicka, 2019. "Funding Shocks and Credit Quality," Tinbergen Institute Discussion Papers 19-060/IV, Tinbergen Institute.
    2. Enrico Perotti & Magdalena Rola-Janicka, 2022. "The Good, the Bad, and the Missed Boom," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 5025-5056.

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    More about this item

    Keywords

    financial crises; financial intermediation; asymmetric information; booms; financial fragility;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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