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Overborrowing and Systemic Externalities in the Business Cycle under Imperfect Information

SSRN, ISSN: 1556-5068
2020
  • 0
    Citations
  • 1,389
    Usage
  • 0
    Captures
  • 0
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Usage
    1,389
    • Abstract Views
      1,127
    • Downloads
      262
  • Ratings
    • Download Rank
      235,672

Article Description

We relax the perfect information assumption in a small open economy with collateral constraints. Under such a condition, households observe income growth but do not perceive whether the underlying shocks are permanent or transitory. Further, the likelihood and severity of financial crises are increased by the interaction between the information friction and a pecuniary externality that emerges when households use an asset valued at market prices as collateral. Due to a more significant welfare loss, the optimal tax to restore constrained efficiency is six times larger than under perfect information.

Bibliographic Details

Juan David Herreño; Carlos Rondón-Moreno

Elsevier BV

Multidisciplinary; overborrowing; macroprudential policy; information frictions JEL classification: D62; D84; E44; F32; F38; F41

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