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Credit crunches as markov equilibria

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  • Azariadis, Costas
  • Choi, Kyoung Jin

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.

Suggested Citation

  • Azariadis, Costas & Choi, Kyoung Jin, 2013. "Credit crunches as markov equilibria," Journal of Macroeconomics, Elsevier, vol. 38(PA), pages 2-11.
  • Handle: RePEc:eee:jmacro:v:38:y:2013:i:pa:p:2-11 DOI: 10.1016/j.jmacro.2013.09.009
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit crunch; Unsecured lending; Financial panics;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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