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Information losses in a dynamic model of credit


  • William W. Lang
  • Leonard I. Nakamura


This paper examines dynamic information losses associated with loan terminations. We assume that the aggregated returns of current borrowers contain information about the mean returns to future borrowers. In a competitive loan market, the value of this information is not fully internalized by individual borrowers and lenders, and loan decisions fail to be first best. Introducing heterogeneous borrowers, who know their own risk characteristics better than lenders, safer borrowers are less willing to borrow when risk premia rise. As they cease borrowing, the information generated in credit markets becomes noisier and this tends to increase risk premia. The model produces alternating and persistent periods of “tight” and “loose” credit.
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  • William W. Lang & Leonard I. Nakamura, 1988. "Information losses in a dynamic model of credit," Working Papers 88-15, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:88-15

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    Cited by:

    1. Lawrence J. White, 1996. "International Regulation of Securities Markets: Competition or Harmonization?," NBER Chapters,in: The Industrial Organization and Regulation of the Securities Industry, pages 207-242 National Bureau of Economic Research, Inc.
    2. Pigini, Claudia & Presbitero, Andrea F. & Zazzaro, Alberto, 2016. "State dependence in access to credit," Journal of Financial Stability, Elsevier, vol. 27(C), pages 17-34.

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    Bank loans ; Credit;


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