Working Paper: NBER ID: w15817
Authors: Marcus Miller; Joseph E. Stiglitz
Abstract: An iconic model with high leverage and overvalued collateral assets is used to illustrate the amplification mechanism driving asset prices to 'overshoot' equilibrium when an asset bubble bursts--threatening widespread insolvency and what Richard Koo calls a 'balance sheet recession'. \n \nBesides interest rates cuts, asset purchases and capital restructuring are key to crisis resolution. The usual bankruptcy procedures for doing this fail to internalise the price effects of asset 'fire-sales' to pay down debts, however. We discuss how official intervention in the form of 'super' Chapter 11 actions can help prevent asset price correction causing widespread economic disruption.
Keywords: No keywords provided
JEL Codes: E32; G21; G32; G33; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high leverage and overvalued collateral assets (G32) | amplify asset prices (G19) |
| asset bubbles (G19) | widespread insolvency (G33) |
| asset bubble bursts (E32) | economic disruptions (F69) |
| traditional bankruptcy procedures (K35) | fail to account for macroeconomic impacts of asset firesales (E44) |
| super chapter 11 actions (G33) | mitigate economic downturn (E69) |
| interest rate cuts (E43) | minimize impacts of financial shocks (F65) |
| capital restructuring efforts (G32) | minimize impacts of financial shocks (F65) |
| asset bubbles (G19) | transfer of assets from productive small businesses to less productive wealth owners (P12) |