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Asset Quality Dynamics

Author

Listed:
  • Erwan Quintin

    (University of Wisconsin Madison)

  • Dean Corbae

    (University of Wisconsin)

Abstract

We describe a dynamic extension of Allen and Gale (1998)'s optimal security design and provide a recursive method for computing equilibria in the resulting environment. The model is quantitatively consistent with the cyclical properties of safe corporate debt issues, in particular with the fact that those issues are less procyclical than other sources of corporate financing. We then use the model to measure the effect of a protracted period of low safe yields, one of the main features of the so-called ``saving glut'' the global economy is currently experiencing. A long period of low interest rates on safe debt causes GDP volatility to go down while, on the other hand, consumption and household income volatility increase significantly.

Suggested Citation

  • Erwan Quintin & Dean Corbae, 2016. "Asset Quality Dynamics," 2016 Meeting Papers 418, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:418
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    Cited by:

    1. Pedro S. Amaral & Dean Corbae & Erwan Quintin, 2016. "A New Perspective on the Finance-Development Nexus," Working Papers (Old Series) 1629, Federal Reserve Bank of Cleveland.
    2. Amaral, Pedro S., 2023. "The demographic transition and the asset supply channel," European Economic Review, Elsevier, vol. 151(C).
    3. Pedro S. Amaral & Dean Corbae & Erwan Quintin, 2020. "Cash‐Flow Tranching And The Macroeconomy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(4), pages 1815-1843, November.
    4. Pedro S. Amaral & Dean Corbae & Erwan Quintin, 2017. "Financial Engineering and Economic Development," Working Papers 16-29R, Federal Reserve Bank of Cleveland.
    5. Babus, Ana & Hachem, Kinda, 2023. "Markets for financial innovation," Journal of Economic Theory, Elsevier, vol. 208(C).

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