Lemons Shocks and Credit Spreads
34 Pages Posted: 21 Aug 2011 Last revised: 16 Oct 2013
Date Written: October 1, 2013
Abstract
This paper develops and estimates a monetary DSGE model with adverse selection in credit markets. The model features a new shock, referred as a lemons shock, which changes the riskiness of debtors in the mean-preserving spread sense with each debtor's riskiness unknown to a creditor. The Bayesian estimation using U.S. data reveals two contrasting results. First, even though a lemons shock affects the degree of adverse selection and thus captures financial disruptions, the shock has little effect on fluctuations at standard business cycle frequencies. In contrast, the shock contributes dominantly to the Great Recession of 2007-2009 by matching a spike in credit spread. The results suggest that the Great Recession differs fundamentally from standard recessions in its causes.
Keywords: Adverse selection, lemons shocks, credit spreads, the Great Recession
JEL Classification: E30, E44, E52
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Credit Frictions and Optimal Monetary Policy
By Vasco Cúrdia and Michael Woodford
-
Credit Frictions and Optimal Monetary Policy
By Vasco Cúrdia and Michael Woodford
-
Credit Frictions and Optimal Monetary Policy
By Vasco Cúrdia and Michael Woodford
-
Credit Spreads and Monetary Policy
By Vasco Cúrdia and Michael Woodford
-
Credit Spreads and Monetary Policy
By Vasco Cúrdia and Michael Woodford
-
Banking and Interest Rates in Monetary Policy Analysis: A Quantitative Exploration
-
Credit and Banking in a DSGE Model of the Euro Area
By Andrea Gerali, Stefano Neri, ...
-
Credit Effects in the Monetary Mechanism
By Cara S. Lown and Donald P. Morgan
-
Conventional and Unconventional Monetary Policy
By Vasco Cúrdia and Michael Woodford
-
Conventional and Unconventional Monetary Policy
By Vasco Cúrdia and Michael Woodford