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Can a "credit crunch" be efficient?

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  • Edward J. Green
  • Soo-Nam Oh

Abstract

Two observations have sometimes been viewed as evidence that the equilibrium allocations of intermediated credit markets are inefficient. First, low-income households' marginal propensity to consume is close to unity. Second, even high-income households seem to face nonprice constraints during recessions. This paper presents a model that possesses both of these features. (A recession is modeled as an economy in which the equilibrium level of investment is at its lowest possible level.) However, contrary to the conventional view, the equilibrium of this model is ex ante efficient. The model also sheds light on some historical episodes of credit restraint.

Suggested Citation

  • Edward J. Green & Soo-Nam Oh, 1991. "Can a "credit crunch" be efficient?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-17.
  • Handle: RePEc:fip:fedmqr:y:1991:i:fall:p:3-17:n:v.15no.4
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    References listed on IDEAS

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    1. Boyd, John H & Smith, Bruce D, 1993. "The Equilibrium Allocation of Investment Capital in the Presence of Adverse Selection and Costly State Verification," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(3), pages 427-451, July.
    2. Christiano, Lawrence J & Eichenbaum, Martin & Marshall, David, 1991. "The Permanent Income Hypothesis Revisited," Econometrica, Econometric Society, vol. 59(2), pages 397-423, March.
    3. Runkle, David E., 1991. "Liquidity constraints and the permanent-income hypothesis : Evidence from panel data," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 73-98, February.
    4. Edward J. Green & Soo-Nam Oh, 1991. "Contracts, Constraints and Consumption," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 883-899.
    5. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
    6. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
    7. Keane, Michael P & Runkle, David E, 1992. "On the Estimation of Panel-Data Models with Serial Correlation When Instruments Are Not Strictly Exogenous," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 1-9, January.
    8. Falk, Barry & Lee, Bong-Soo, 1990. "Time-series implications of Friedman's Permanent Income Hypothesis," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 267-283, October.
    9. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
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    Citations

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    Cited by:

    1. Mingwei Yuan & Christian Zimmermann, 2000. "Financial Intermediation with Heterogeneous Projects: An Application to the Japanese Credit Crunch," Cahiers de recherche CREFE / CREFE Working Papers 115, CREFE, Université du Québec à Montréal.
    2. Mingwei Yuan & Christian Zimmermann, 1999. "Credit Crunch, Bank Lending and Monetary Policy: A Model of Financial Intermediation with Heterogeneous Projects," Cahiers de recherche CREFE / CREFE Working Papers 89, CREFE, Université du Québec à Montréal.
    3. David Backus & Silverio Foresi & Liuren Wu, 2002. "Contagion in Financial Markets," Finance 0207009, EconWPA.
    4. Yuan, Mingwei & Zimmermann, Christian, 2004. "Credit crunch in a model of financial intermediation and occupational choice," Journal of Macroeconomics, Elsevier, vol. 26(4), pages 637-659, December.

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    Keywords

    Credit;

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