How I Learned to Stop Worrying and Love Fire Sales

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.

Pablo Kurlat

NBER

June 2018

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By |2018-06-26T14:26:16+00:00January 1st, 2018|Financial Regulation, Reference, Systemic Risk/Financial Crises|