Premio Anual de Investigación Económica “Dr. Raúl Prebisch”
How I Learned to Stop Worrying and Love Fire Sales
Pablo Kurlat
2018-07-12 - 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.