Ignorance, Debt and Financial Crises
نویسندگان
چکیده
In this paper we provide a theory of money markets and private money. We show that preserving symmetric ignorance in liquidity provision is welfare maximizing and strictly dominates symmetric or even perfect information. A key property for the functioning of money markets is when agents have no need to ask questions and no incentive to produce private information about the value of the security. Debt is the optimal private money because it is least information acquisition sensitive. Bad public news (shock) about the fundamentals of assets that back debt can cause information-insensitive debt to become information-acquisition sensitive. The expected value of debt drops, but to prevent endogenous adverse selection agents reduce the amount of trade below the expected value of debt. The shock is amplified, leading to a financial crisis. + Thanks to seminar participants at the 2009 Yale Cowles Foundation Summer Economic Theory Conference, the Financial Intermediation Research Society Florence Conference, the JME/SNB/SGC Conference, the New York Fed, Wharton, NYU, HBS, Columbia Business School, MIT, Princeton, University College London, the European Central Bank, the IMF, the Milton Friedman Institute at the University of Chicago, Bonn, Mannheim, Stanford, the Philadelphia Federal Reserve Bank, and to Patrick Bolton, Yeonkoo Che, Peter DeMarzo, Douglas Diamond, Jon Levin, Robert Lucas, Yukitoshi Matsushita, Stewart Myers, Jean-Charles Rochet, Ernst-Ludwig von Thadden, Robert Wilson, and Mark Wolfson for comments and suggestions.
منابع مشابه
Simultaneous Occurrence of Banking Debt and Currency Crises (Triple Crises) in Iranian Economy and Its Determining Factors During the Period 1980-2017
In monetary and financial literature, financial crises include a wide range of crises. But in general, there are three important types of financial crisis, including the currency crisis. The banking crisis and the debt crisis. The aim of this study is to simultaneously analyze the occurrence of banking, debt and currency crises, known as the three crises in Iran. For this purpose, first to dete...
متن کاملFinancial Crises and the Optimality of Debt for Liquidity Provision
Systemic financial crises involve debt (leverage). We provide a theory of the optimality of debt, which nevertheless can lead to a crisis. Trade is best implemented by debt because it provides the smallest incentive for private information production, which creates trade-reducing adverse selection. Debt preserves symmetric ignorance between counterparties. Debt is least information-sensitive: t...
متن کاملThe Benefits and Risks of Short-Term Borrowing THE RECENT FINANCIAL CRISES IN EAST
THE RECENT FINANCIAL CRISES IN EAST Asia, Russia, and elsewhere, and the earlier crisis in Mexico, have heightened interest in the subject of short-term borrowing by developing countries and the benefits and risks associated with such debt.1 This chapter examines the growth and determinants of short-term debt from international banks, the behavior of such debt during economic shocks, and its as...
متن کاملFundamentals News , Global Liquidity and Macroprudential Policy ∗
We study optimal macroprudential policy in a model in which unconventional shocks, in the form of news about future fundamentals and regime changes in world interest rates, interact with collateral constraints in driving the dynamics of financial crises. These shocks strengthen incentives to borrow in good times (i.e. when “good news” about future fundamentals coincide with a low-world-interest...
متن کامل