Risk Allocation, Debt Fueled Expansion and Financial Crisis / Paul Beaudry, Amartya Lahiri.

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Beaudry, Paul

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w15110.Publication details: Cambridge, Mass. National Bureau of Economic Research 2009.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: In this paper we discuss how several macroeconomic features of the 2001-2009 period may have resulted from a process in which financial markets were trying to allocate risk between heterogeneous agents when productive investment opportunities are scarce. We begin by showing how heterogeneity in terms of risk tolerance can cause financial markets to propagate transitory shocks and induce higher output volatility, albeit with a higher mean. We then show how this simple heterogeneous agent framework can explain an expansion driven by the growth in consumer debt, and why the equilibrium path of such an economy is likely fragile. In particular, we demonstrate that the emergence of a small amount of asymmetric information can make the economy susceptible to changes in expectations that can induce large reversals of financial flows, the freezing of assets and a recession that can persist despite high productivity.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w15110 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w15108 Default, Framing and Spillover Effects: The Case of Lifecycle Funds in 401(k) Plans /	nber w15109 Tax reform, delocation and heterogeneous firms /	nber w1511 Life Cycle Annuity Valuation /	nber w15110 Risk Allocation, Debt Fueled Expansion and Financial Crisis /	nber w15111 Risk Sharing, Inequality and Fertility /	nber w15112 Anti-Lemons: School Reputation and Educational Quality /	nber w15113 Global Savings and Global Investment: The Transmission of Identified Fiscal Shocks /	Next

June 2009.

In this paper we discuss how several macroeconomic features of the 2001-2009 period may have resulted from a process in which financial markets were trying to allocate risk between heterogeneous agents when productive investment opportunities are scarce. We begin by showing how heterogeneity in terms of risk tolerance can cause financial markets to propagate transitory shocks and induce higher output volatility, albeit with a higher mean. We then show how this simple heterogeneous agent framework can explain an expansion driven by the growth in consumer debt, and why the equilibrium path of such an economy is likely fragile. In particular, we demonstrate that the emergence of a small amount of asymmetric information can make the economy susceptible to changes in expectations that can induce large reversals of financial flows, the freezing of assets and a recession that can persist despite high productivity.