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Credit expansion and credit misallocation

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  • Bleck, Alexander
  • Liu, Xuewen

Abstract

We develop a general equilibrium model to analyze the interaction between two sectors with differing degree of financial friction in the context of liquidity injections (credit expansion). We show that excessive liquidity injection can overheat the sector with lower friction, crowding liquidity out of the sector with higher friction. The crowding-out manifests in a self-reinforcing spiral because of feedback between liquidity inflows, asset prices, and collateral values. The paper highlights the effect of financial frictions on the allocation and distribution of liquidity in an economy, demonstrating misallocation of liquidity (credit) under excessive liquidity injection.

Suggested Citation

  • Bleck, Alexander & Liu, Xuewen, 2018. "Credit expansion and credit misallocation," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 27-40.
  • Handle: RePEc:eee:moneco:v:94:y:2018:i:c:p:27-40
    DOI: 10.1016/j.jmoneco.2017.09.012
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    Cited by:

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    2. Shuonan Zhang, 2020. "State-owned enterprises and entrusted lending: A DSGE analysis for growth and business cycles in China," Working Papers in Economics & Finance 2020-01, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    3. Kenneth S. Rogoff & Yuanchen Yang, 2020. "Peak China Housing," NBER Working Papers 27697, National Bureau of Economic Research, Inc.
    4. Kenneth Rogoff & Yuanchen Yang, 2021. "Has China's Housing Production Peaked?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 29(1), pages 1-31, January.
    5. Wei, Xiaoyun & Li, Jie & Han, Liyan, 2020. "Optimal targeted reduction in reserve requirement ratio in China," Economic Modelling, Elsevier, vol. 85(C), pages 1-15.
    6. Xiaojie Wang & Yi Duan & Pengcheng Liu & Guixin Han, 2020. "The Influence of Housing Investment on Urban Innovation: An Empirical Analysis Based on City-Level Panel Data in China," Sustainability, MDPI, Open Access Journal, vol. 12(7), pages 1-15, April.

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    More about this item

    Keywords

    Corporate liquidity; Collateral values; Asset specificity; Speculation; Financial intermediaries;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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