Heterogeneous borrowers, liquidity, and the search for credit.
We develop a general equilibrium model of credit formation where borrowers and lenders must search for matches and where the composition of borrowers adjusts to satisfy equilibrium entry conditions. When market liquidity dries up as a result of fundamental shocks to the system, fewer borrowers will participate in the credit market with low-quality borrowers suffering disproportionately because of a flight to quality. However, less liquid credit markets need not be associated with lower social output, because the effect of higher average quality may outweigh that of reduced market participation, depending crucially on the source of the liquidity shock.
|Main Author:||Becsi, Zsolt.|
|Other Authors:||Li, Victor., Wang, Ping.|