Published September 2022
| public
Journal Article
Wealth, endogenous collateral quality, and financial crises
- Creators
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Liu, Zehao
- Sinclair, Andrew J.
Abstract
We propose a model of collateralized lending in which (1) borrowers endogenously determine collateral quality and (2) lenders can produce costly information about collateral payoffs. Our model yields several novel predictions: wealthier economies use lower quality collateral in equilibrium, have more severe financial crises, and have less frequent crises. We provide both micro and macro empirical evidence. In the U.S. mortgage market wealthier lenders accept lower quality collateral, and, looking across countries, wealthier economies use lower quality collateral and the collateral channel explains the link between wealth and crisis severity.
Additional Information
We thank Guillermo Ordoñez (the Editor) and two anonymous referees for constructive comments that helped improve the paper. We also thank Gary Gorton, Ping He, Zongbo Huang, Toomas Laarits, Andrew Metrick, Alexander Zentefis, and seminar participants at the Federal Reserve Board of Governors, the University of Hong Kong, Renmin University of China, and EEA Annual Congress for helpful discussions and comments. An earlier version of this paper previously circulated as "Wealth and Financial Crisis: The Collateral Channel". Zehao Liu would like to thank the financial support from the National Natural Science Foundation of China (Grant No. 72003189).Additional details
- Eprint ID
- 116616
- Resolver ID
- CaltechAUTHORS:20220829-467858200.778
- 72003189
- National Natural Science Foundation of China
- Created
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2022-09-09Created from EPrint's datestamp field
- Updated
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2022-10-05Created from EPrint's last_modified field