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Asset Price Booms and Macroeconomic Debt Overhang

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  • Keiichiro KOBAYASHI

Abstract

We propose a tractable model of financial crises to demonstrate that corporate debt restructuring can promote economic recovery. The model can replicate the following empirical regularities: Credit-fueled asset-price booms end up with collapses, followed by deep and persistent recessions with productivity declines. Risk-shifting firms amplify the booms and busts of asset prices by purchasing the assets by borrowed money. Resultant debt overhang lowers productivity and output by discouraging borrowing firms from expending additional efforts. This inefficiency is aggravated by the spillover effect in the monopolistic competition. Larger asset-price booms are followed by deeper and more persistent recessions. The ex-post government subsidy to lenders for implementing debt relief can improve the borrowers' productivity and increase the lenders' payoff and social welfare, without inducing time inconsistency.

Suggested Citation

  • Keiichiro KOBAYASHI, 2024. "Asset Price Booms 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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    References listed on IDEAS

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