101-2011-L17

101-2011-L17 - Econ101 CreditMarket Imperfections Review...

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Econ 101 Credit Market  Imperfections Review
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What to read n Today: Chapter 9, pages 313-326
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Percentage Deviations from Trend in  Labor Productivity
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Percentage Deviations from Trend in  Aggregate Consumption
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Credit Market Imperfections n The 2007-2009 crisis has its roots in the  financial sector n Failure  of Ricardian Equivalence n What are the major financial  imperfections and how they affect  consumer choices?
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Two Major Financial Frictions n Asymmetric information n Some market participant knows more than  the others n Lenders do not know enough about borrowers’  creditworthiness n Issuers of mortgage backed securities know  more than the buyers n Implications: n Endogenous interest rate spreads n Crowding out of good borrowers (securities)
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Two Major Financial Frictions n Limited commitment n People or firms cannot commit to repay  loans n Mortgages n Repo market (Repurchase agreements) n A role for 
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101-2011-L17 - Econ101 CreditMarket Imperfections Review...

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