Can a \\"credit crunch\\" be efficient?
Abstract: Two observations have sometimes been viewed as evidence that the equilibrium allocations of intermediated credit markets are inefficient. First, low-income households' marginal propensity to consume is close to unity. Second, even high-income households seem to face nonprice constraints during recessions. This paper presents a model that possesses both of these features. (A recession is modeled as an economy in which the equilibrium level of investment is at its lowest possible level.) However, contrary to the conventional view, the equilibrium of this model is ex ante efficient. The model also sheds light on some historical episodes of credit restraint.
File(s): File format is text/html http://minneapolisfed.org/research/qr/qr1541.html
File(s): File format is application/pdf http://minneapolisfed.org/research/qr/qr1541.pdf
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Quarterly Review
Publication Date: 1991