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Asset-Price Collapse and Macroeconomic Debt Overhang

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  • Keiichiro KOBAYASHI

Abstract

We provide a tractable two-period model of financial crises that replicates empirical regularities that credit-fueled asset-price booms are often followed by the busts and deep and persistent recessions associated with productivity declines. We argue that the risk-shifting booms of asset prices tend to collapse, and resultant debt overhang lowers productivity and output by discouraging borrowers from expending efforts. This inefficiency is amplified by externality of a decrease in aggregate demand. Larger asset-price booms lead to deeper recessions. Ex-post government intervention to facilitate debt restructuring can be welfare improving, because it mitigates the demand externality and the associated time inconsistency may not have dominant effects.

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  • Keiichiro KOBAYASHI, 2024. "Asset-Price Collapse and Macroeconomic Debt Overhang," CIGS Working Paper Series 24-004E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:24-004e
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    1. Olivier Jeanne & Anton Korinek, 2020. "Macroprudential Regulation versus mopping up after the crash," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(3), pages 1470-1497.
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