IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Adverse Selection and the Accelerator

Listed author(s):
  • Christopher L. House

    (University of Michigan)

This paper reexamines the relationship between financial market imperfections and economic instability. I present a model in which financial accelerator effects come from adverse selection in credit markets. Unlike other models of the financial accelerator, the model I present has the potential to stabilize the economy rather than destabilize it. The stabilizing forces in the dynamic model are closely related to forces that cause overinvestment in static models. Consequently, the stabilizing properties of the model are not specific to adverse selection but rather are present in any environment in which credit market distortions cause overinvestment. When investment projects are equity financed, or when contracts are written optimally, the only equilibria that emerge are stabilizer equilibria. Thus, stabilizing outcomes are more robust in this model. Finally, the empirical distinction between accelerator equilibria and stabilizer equilibria is subtle. Many statistics used to test for financial accelerators are observationally equivalent in stabilizer equilibria.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://econwpa.repec.org/eps/mac/papers/0211/0211015.pdf
Download Restriction: no

Paper provided by EconWPA in its series Macroeconomics with number 0211015.

as
in new window

Length: 38 pages
Date of creation: 22 Nov 2002
Handle: RePEc:wpa:wuwpma:0211015
Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on HP; pages: 38 ; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
  2. Ben S. Bernanke & Alan S. Blinder, 1988. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
  3. Gertler, Mark, 1995. "Monetary and Financial Interactions in the Business Cycle: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1342-1353, November.
  4. Ben Bernanke & Mark Gertler, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 87-114.
  5. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier.
  6. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  7. Bruce C. Greenwald & Joseph E. Stiglitz & Andrew Weiss, 1984. "Informational Imperfections in the Capital Market and Macro-Economic Fluctuations," NBER Working Papers 1335, National Bureau of Economic Research, Inc.
  8. Charles W. Calomiris & R. Glenn Hubbard, 1988. "Firm Heterogeneity, Internal Finance, and `Credit Rationing'," NBER Working Papers 2497, National Bureau of Economic Research, Inc.
  9. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  10. Charles W. Calomiris & Charles P. Himmelberg & Paul Wachtel, 1994. "Commercial Paper, Corporate Finance, and the Business Cycle: A Microeconomic Perspective," NBER Working Papers 4848, National Bureau of Economic Research, Inc.
  11. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
  12. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1994. "The Financial Accelerator and the Flight to Quality," Working Papers 94-24, C.V. Starr Center for Applied Economics, New York University.
  13. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-492, June.
  14. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  15. repec:cup:macdyn:v:4:y:2000:i:4:p:423-47 is not listed on IDEAS
  16. Gertler, M. & Gilchrist, S., 1992. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 92-08, C.V. Starr Center for Applied Economics, New York University.
  17. Cooper, Russell & Ejarque, Jo o, 2000. "Financial Intermediation And Aggregate Fluctuations: A Quantitative Analysis," Macroeconomic Dynamics, Cambridge University Press, vol. 4(04), pages 423-447, December.
  18. Bacchetta, Philippe & Caminal, Ramon, 1996. "Do Capital Market Imperfections Exacerbate Output Fluctuations?," CEPR Discussion Papers 1422, C.E.P.R. Discussion Papers.
  19. Azariadis, Costas & Smith, Bruce, 1998. "Financial Intermediation and Regime Switching in Business Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 516-536, June.
  20. David de Meza & David C. Webb, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 281-292.
  21. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-588, August.
  22. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  23. Anil K. Kashyap & Jeremy C. Stein & David W. Wilcox, 1991. "Monetary policy and credit conditions: evidence from the composition of external finance," Finance and Economics Discussion Series 154, Board of Governors of the Federal Reserve System (U.S.).
  24. Andrea L. Eisfeldt, 2004. "Endogenous Liquidity in Asset Markets," Journal of Finance, American Finance Association, vol. 59(1), pages 1-30, 02.
  25. Mark Gertler & R. Glenn Hubbard & Anil Kashyap, 1990. "Interest Rate Spreads, Credit Constraints, and Investment Fluctuations: An Empirical Investigation," NBER Working Papers 3495, National Bureau of Economic Research, Inc.
  26. Azariadis, Costas & Chakraborty, Shankha, 1999. "Agency Costs in Dynamic Economic Models," Economic Journal, Royal Economic Society, vol. 109(455), pages 222-241, April.
  27. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04.
  28. Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  29. Russell Cooper & Joao Ejarque, 1994. "Financial Intermediation and Aggregate Fluctuations: A Quantative Analysis," NBER Working Papers 4819, National Bureau of Economic Research, Inc.
  30. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
  31. William W. Lang & Leonard I. Nakamura, 1992. ""Flight to quality" in bank lending and economic activity," Working Papers 92-20, Federal Reserve Bank of Philadelphia.
  32. Timothy S. Fuerst, 1994. "Monetary and financial interaction in the business cycle," Proceedings, Federal Reserve Bank of Cleveland, pages 1321-1353.
  33. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  34. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October.
  35. Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series 93-5, Board of Governors of the Federal Reserve System (U.S.).
  36. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
  37. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0211015. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.