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Credit crunches as markov equilibria

  • Azariadis, Costas
  • Choi, Kyoung Jin

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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