Working Paper: NBER ID: w24752
Authors: Pablo Kurlat
Abstract: 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.
Keywords: fire sales; financial constraints; investment; macroprudential policy
JEL Codes: D62; D82; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Misallocation (D61) | Investment decisions of agents (G11) |
| Falling asset prices (G19) | Investment decisions of agents (G11) |
| Falling asset prices (G19) | Marginal productivity of capital (D24) |
| Asymmetric information (D82) | Level of investment (G31) |
| Higher investment levels (E22) | Pool of capital (E22) |
| Different microfoundations for fire sales (E44) | Policy recommendations regarding investment (F21) |