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Abstract Two alternative models of fire sales that yield the same aggregate predictions have different normative implications. If fire sales result from marginal misallocation, a pecuniary externality leads to ex-ante… Click to show full abstract
Abstract Two alternative models of fire sales that yield the same aggregate predictions have different normative implications. If fire sales result from marginal misallocation, a pecuniary externality leads to ex-ante overinvestment. If they result from asymmetric information, the overinvestment result is reversed. However, there may be a tradeoff between present and future underinvestment. Ex-ante macroprudential policy may need to treat different types of investment differently, but ex-post intervention is useful in both cases.
Journal Title: Journal of Monetary Economics
Year Published: 2021
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