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3 Cards in this Set
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Asymmetric information problems |
Are always present in financial transactions, but normally do not prevent the financial system from efficiently channeling funds from lender-savers to borrower-spenders. During a financial crisis, however, asymmetric information problems intensify to such a degree that the resulting financial frictions lead to flows of funds being halted or severely disrupted |
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How can a bursting of an asset-price bubble in the stock market help trigger a financial crisis? |
When an asset-price bubble bursts and asset prices realign with fundamental economic values, the resulting decline in net worth means that businesses have less skin in the game and so have incentives to take on more risk at the lender's expense, increasing the moral hazard problem. In addition, lower net worth means there is less collateral and so adverse selection increases. The bursting of an asset-price bubble therefore makes borrowers less credit-worthy and causes a contraction in lending and spending. The asset-price bust can also lead to a deterioration in financial institutions' balance sheets, which causes them to deleverage, further contributing to the decline in lending and economic activity |
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How does am unanticipated decline in the price level cause a drop in lending? |
Aanvullen |
