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Balance sheet recessions with information and trading frictions

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  • Vladimir Asriyan

    (CREi, UPF, and Barcelona GSE)

Abstract

Balance sheet recessions result from concentration of macroeconomic risks on the balance sheets of leveraged agents. In this paper, I argue that information dispersion about the future states of the economy combined with trading frictions in financial markets can explain why such concentration of risk may be privately but not socially optimal. I show that borrowers face a tradeoff between the insurance benefits of financing with macro contingent contracts and the rents they need to pay creditors for holding such claims. In aggregate, as borrowers sacrifice contingency in order to provide liquidity, the severity of macroeconomic fluctuations becomes endogenously linked to the magnitudes of information dispersion and trading frictions. In this setting, I study the problem of a constrained social planner and show that policies promoting both issuance and trade of contingent contracts can be Pareto improving.

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  • Vladimir Asriyan, 2018. "Balance sheet recessions with information and trading frictions," 2018 Meeting Papers 205, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:205
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    Cited by:

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    2. Barney Hartman‐Glaser & Benjamin Hébert, 2020. "The Insurance Is the Lemon: Failing to Index Contracts," Journal of Finance, American Finance Association, vol. 75(1), pages 463-506, February.
    3. Felipe Iachan & Dejanir Silva, 2019. "Risk externalities," 2019 Meeting Papers 338, Society for Economic Dynamics.
    4. Luigi Bocola & Guido Lorenzoni, 2023. "Risk-Sharing Externalities," Journal of Political Economy, University of Chicago Press, vol. 131(3), pages 595-632.
    5. Vladimir Asriyan & Luc Laeven & Alberto Martin & Alejandro Van der Ghote & Victoria Vanasco, 2021. "Falling Interest Rates and Credit Misallocation: Lessons from General Equilibrium," Working Papers 1268, Barcelona School of Economics.
    6. Vladimir Asriyan & Luc Laeven & Alberto Martin & Alejandro Van der Ghote & Victoria Vanasco, 2021. "Falling interest rates and credit reallocation: Lessons from general equilibrium," Economics Working Papers 1784, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2022.
    7. Kurlat, Pablo, 2021. "Investment externalities in models of fire sales," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 102-118.
    8. Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2017. "Imperfect Financial Markets and Shareholder Incentives in Partial and General Equilibrium," NBER Working Papers 23419, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • 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
    • G01 - Financial Economics - - General - - - Financial Crises

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