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Inefficient Investment Waves

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  • Zhiguo He
  • Péter Kondor

Abstract

We develop a dynamic model of trading and investment with limited aggregate resources to study investment cycles. Unverifiable idiosyncratic investment opportunities imply market prices to play a role of rent distribution, distorting private investment incentives from a social point of view. This distortion is price-dependent, leading to two-sided inefficient investment cycles--too much investment in booms with high prices and too little in recessions with low prices. Interventions targeting only the underinvestment in recessions might make all agents worse off. We connect our results to both industry specific and aggregate boom-and-bust patterns.

Suggested Citation

  • Zhiguo He & Péter Kondor, 2012. "Inefficient Investment Waves," NBER Working Papers 18217, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18217
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    Cited by:

    1. Hassan Belkacem GHASSAN, 2017. "New alternative measuring financial stability," Turkish Economic Review, KSP Journals, vol. 4(3), pages 275-281, September.
    2. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.
    3. Zhiguo He & Péter Kondor, 2016. "Inefficient Investment Waves," Econometrica, Econometric Society, vol. 84, pages 735-780, March.
    4. Matthew Rognlie & Andrei Shleifer & Alp Simsek, 2018. "Investment Hangover and the Great Recession," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(2), pages 113-153, April.
    5. Olga A. Rud & Jean Paul Rabanal & Manizha Sharifova, 2018. "An experiment on the efficiency of bilateral exchange under incomplete markets," Working Papers 123, Peruvian Economic Association.
    6. Olkhov, Victor, 2017. "Quantitative wave model of macro-finance," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 143-150.
    7. Zhiguo He & Arvind Krishnamurthy, 2012. "A macroeconomic framework for quantifying systemic risk," Working Paper Research 233, National Bank of Belgium.
    8. repec:eee:moneco:v:90:y:2017:i:c:p:113-124 is not listed on IDEAS
    9. Eisenbach, Thomas M. & Phelan, Gregory, 2018. "Cournot fire sales," Staff Reports 837, Federal Reserve Bank of New York.
    10. repec:eee:rensus:v:78:y:2017:i:c:p:554-587 is not listed on IDEAS
    11. Dow, James & Han, Jungsuk, 2015. "Contractual incompleteness, limited liability and asset price bubbles," Journal of Financial Economics, Elsevier, vol. 116(2), pages 383-409.
    12. Moore, John, 2013. "Pecuniary Externality through Credit Constraints: Two Examples without Uncertainty," SIRE Discussion Papers 2013-71, Scottish Institute for Research in Economics (SIRE).
    13. Ye Li, 2018. "Fragile New Economy: The Rise of Intangible Capital and Financial Instability," 2018 Meeting Papers 1189, Society for Economic Dynamics.
    14. Parlatore, Cecilia, 2016. "Fragility in money market funds: Sponsor support and regulation," Journal of Financial Economics, Elsevier, vol. 121(3), pages 595-623.
    15. Gersbach, Hans & Rochet, Jean-Charles, 2017. "Capital regulation and credit fluctuations," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 113-124.

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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