NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Risk Allocation, Debt Fueled Expansion and Financial Crisis

Paul Beaudry, Amartya Lahiri

NBER Working Paper No. 15110
Issued in June 2009
NBER Program(s):   EFG

In this paper we discuss how several macroeconomic features of the 2001-2009 period may have resulted from a process in which financial markets were trying to allocate risk between heterogeneous agents when productive investment opportunities are scarce. We begin by showing how heterogeneity in terms of risk tolerance can cause financial markets to propagate transitory shocks and induce higher output volatility, albeit with a higher mean. We then show how this simple heterogeneous agent framework can explain an expansion driven by the growth in consumer debt, and why the equilibrium path of such an economy is likely fragile. In particular, we demonstrate that the emergence of a small amount of asymmetric information can make the economy susceptible to changes in expectations that can induce large reversals of financial flows, the freezing of assets and a recession that can persist despite high productivity.

download in pdf format
   (585 K)

email paper

This paper is available as PDF (585 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15110

Users who downloaded this paper also downloaded these:
Reinhart and Rogoff w15795 From Financial Crash to Debt Crisis
Aizenman w15018 Financial Crisis and the Paradox of Under- and Over-Regulation
Jagannathan, Kapoor, and Schaumburg w15404 Causes of the Great Recession of 2007-9: The Financial Crisis is the Symptom not the Disease!
Caballero w15636 The "Other" Imbalance and the Financial Crisis
Campello, Graham, and Harvey w15552 The Real Effects of Financial Constraints: Evidence from a Financial Crisis
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us