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.
Format: Villanova Faculty Authorship
Language: English
Published: 2004
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dc_source_str_mv Journal of Economic Dynamics & Control 29, 2005, 1331-1360.
author Becsi, Zsolt.
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Li, Victor.
Wang, Ping.
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Li, Victor.
Wang, Ping.
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Heterogeneous borrowers, liquidity, and the search for credit.
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Wang, Ping.
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Wang, Ping.
dc_title_str Heterogeneous borrowers, liquidity, and the search for credit.
title Heterogeneous borrowers, liquidity, and the search for credit.
title_short Heterogeneous borrowers, liquidity, and the search for credit.
title_full Heterogeneous borrowers, liquidity, and the search for credit.
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title_full_unstemmed Heterogeneous borrowers, liquidity, and the search for credit.
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description 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.
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dc.title Heterogeneous borrowers, liquidity, and the search for credit.
dc.creator Becsi, Zsolt.
Li, Victor.
Wang, Ping.
dc.description 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.
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