Can a "Credit Crunch" Be Efficient?

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Creator Series Issue number
  • Vol. 15, No. 4
Date created
  • 1991 Fall
Abstract

  • Two observations have sometimes been viewed as evidence that the equilibrium allocations of intermediated credit markets are inefficient. First, low-income households' marginal propensity to consume is close to unity. Second, even high-income households seem to face nonprice constraints during recessions. This paper presents a model that possesses both of these features. (A recession is modeled as an economy in which the equilibrium level of investment is at its lowest possible level.) However, contrary to the conventional view, the equilibrium of this model is ex ante efficient. The model also sheds light on some historical episodes of credit restraint.

Corporate Author
  • Federal Reserve Bank of Minneapolis. Research Department
Publisher
  • Federal Reserve Bank of Minneapolis
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