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Asset Quality Cycles

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  • Fukui, Masao

Abstract

Systemic risk builds up during booms in an economy featuring asymmetric information in asset markets, where investors’ hidden effort choices endogenously determine asset quality distribution. Higher asset prices during booms induce more investors to sell their assets, which lowers their incentive to improve quality. This quality deterioration in turn makes the economy vulnerable to future exogenous shocks because market breakdowns become more likely. Private agents do not internalize that their effort choices worsen future adverse selection problems, and thus the planner may improve welfare by taxing trade and thereby lowering asset prices.

Suggested Citation

  • Fukui, Masao, 2018. "Asset Quality Cycles," Journal of Monetary Economics, Elsevier, vol. 95(C), pages 97-108.
    • Handle: RePEc:eee:moneco:v:95:y:2018:i:c:p:97-108
    DOI: 10.1016/j.jmoneco.2018.02.006
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    References listed on IDEAS

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    Cited by:

    1. Lee, Michael Junho & Neuhann, Daniel, 2023. "Collateral quality and intervention traps," Journal of Financial Economics, Elsevier, vol. 147(1), pages 159-171.
    2. Heinsalu, Sander, 2020. "Investing to access an adverse selection market," International Journal of Industrial Organization, Elsevier, vol. 72(C).
    3. Vladimir Asriyan & Victoria Vanasco, 2019. "Security Design in Non-Exclusive Markets with Asymmetric Information," Working Papers 1164, Barcelona School of Economics.
    4. Nicolas Caramp, 2021. "Sowing the Seeds of Financial Crises: Endogenous Asset Creation and Adverse Selection," Working Papers 342, University of California, Davis, Department of Economics.
    5. Michael Junho Lee & Daniel Neuhann, 2019. "A Dynamic Theory of Collateral Quality and Long-Term Interventions," Staff Reports 894, Federal Reserve Bank of New York.
    6. Kurlat, Pablo, 2021. "Investment externalities in models of fire sales," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 102-118.
    7. Yun Gao & Kenichi Ueda, 2024. "Loan Screening When Banks Have Superior Information Technology," CARF F-Series CARF-F-580, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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    More about this item

    Keywords

    Adverse selection; Endogenous quality; Moral hazard; Business cycle;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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