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Investment externalities in models of fire sales

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  • Kurlat, Pablo

Abstract

Two alternative models of fire sales that yield the same aggregate predictions have different normative implications. If fire sales result from marginal misallocation, a pecuniary externality leads to ex-ante overinvestment. If they result from asymmetric information, the overinvestment result is reversed. However, there may be a tradeoff between present and future underinvestment. Ex-ante macroprudential policy may need to treat different types of investment differently, but ex-post intervention is useful in both cases.

Suggested Citation

  • Kurlat, Pablo, 2021. "Investment externalities in models of fire sales," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 102-118.
    • Handle: RePEc:eee:moneco:v:122:y:2021:i:c:p:102-118
    DOI: 10.1016/j.jmoneco.2021.07.005
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    Cited by:

    1. Spiros Bougheas & Adam Hal Spencer, 2022. "Fire sales and ex ante valuation of systemic risk: A financial equilibrium networks approach," Discussion Papers 2022/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

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    More about this item

    Keywords

    Fire sales; Pecuniary externality; Asymmetric information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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