How I Learned to Stop Worrying and Love Fire Sales
In canonical models with financial constraints, the possibility of fire sales creates a pecuniary externality that results in ex-ante overinvestment. I show that this result is sensitive to the microfoundations for fire sales. If they result from asymmetric information instead of misallocation, the overinvestment result is reversed. Macroprudential policy may therefore need to treat different types of investment differently.
I am grateful to Adrien Auclert, Alex Bloedel, Sebastian Di Tella, Peter Kondor and Arvind Krishnamurthy for helpful comments. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.