Breaking the spell with credit-easing: self-confirming credit crises in competitive search economies
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- dc.contributor.author Gaballo, Gaetanoca
- dc.contributor.author Marimon, Ramonca
- dc.date.accessioned 2016-03-16T17:35:49Z
- dc.date.available 2016-03-16T17:35:49Z
- dc.date.issued 2016-03
- dc.description.abstract We show that credit crises can be Self-Confirming Equilibria (SCE), which provides a new rationale for policy interventions like, for example, the FRB’s TALF credit-easing program in 2009.We introduce SCE in competitive credit markets with directed search. These markets are efficient when lenders have correct beliefs about borrowers’ reactions to their offers. Nevertheless, credit crises – where high interest rates self-confirm high credit risk - can arise when lenders have correct beliefs only locally around equilibrium outcomes. Policy is needed because competition deters the socially optimal degree of information acquisition via individual experiments at low interest rates. A policy maker with the same beliefs as lenders will find it optimal to implement a targeted subsidy to induce low interest rates and, as a by-product, generate new information for the market. We provide evidence that the 2009 TALF was an example of such Credit Easing policy. We collect new micro-data on the ABS auto loans in the US before and after the policy intervention, and we test, successfully, our theory in this case.ca
- dc.format.mimetype application/pdfca
- dc.identifier.uri http://hdl.handle.net/10230/26001
- dc.language.iso engca
- dc.relation.ispartofseries Ademus Working Paper Series; 1
- dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
- dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.ca
- dc.rights.accessRights info:eu-repo/semantics/openAccessca
- dc.rights.uri https://creativecommons.org/licenses/by/4.0/ca
- dc.subject.keyword Unconventional policies
- dc.subject.keyword Learning
- dc.subject.keyword Credit crisis
- dc.subject.keyword Social experimentation
- dc.subject.keyword Self-confirming
- dc.subject.keyword Equilibrium
- dc.subject.keyword Directed search
- dc.title Breaking the spell with credit-easing: self-confirming credit crises in competitive search economiesca
- dc.type info:eu-repo/semantics/workingPaperca