TY  - JOUR
AU  - Beaudry,Paul
AU  - Lahiri,Amartya
TI  - Risk Allocation, Debt Fueled Expansion and Financial Crisis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15110
PY  - 2009
Y2  - June 2009
UR  - http://www.nber.org/papers/w15110
L1  - http://www.nber.org/papers/w15110.pdf
N1  - Author contact info:
Paul Beaudry
Department of Economics
University of British Columbia
Vancouver, Canada
Tel: 604/822-8624
Fax: 604/822-5915
E-Mail: paulbe@interchange.ubc.ca

Amartya Lahiri
Department of Economics
University of British Columbia
Vancouver, BC V6T 1Z1
Tel: 604-822-8606
E-Mail: alahiri@interchange.ubc.ca
AB  - 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.
ER  -