Ebook Microeconomics (6/E): Part 2
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Ebook Microeconomics (6/E): Part 2
www.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2 Chapter 10, students will be able to:10.1Construct the basic credit market imperfections problem for the consumer, wilH a kinked budgel constraint.10.2Adapt the credit markets model lo deal with asymmetric information.10.3Show how limited commitment makes collateral important in the. credit markets Ebook Microeconomics (6/E): Part 2 model.10.4Show how pay-as-you-go social security works, and demonstrate what conditions are required so that it increases economic welfare.10.5Show hEbook Microeconomics (6/E): Part 2
ow fully funded social security programs function, and explain their economic role.In Chapter 9, we explored the basic elements of consumer behavior iwww.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2 studied the aggregate effects of changes in government lax policy. A key theoretical result from Chapter 9 is the Ricardian equivalence theorem, which stales that a change in the liming of taxes can have no effects on consumer behavior or interest rates, provided that some special conditions hold. Ebook Microeconomics (6/E): Part 2The Ricardian equivalence theorem provides US with a firm foundation for understanding the circumstances under which government tax policy will matterEbook Microeconomics (6/E): Part 2
. In particular, as discussed in Chapter 9. the Ricardian equivalence theorem will not hold if the tax burden is not shared equally among consumers, iwww.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2axes, if there are tax distortions, or if there are credit market imperfections.The cases under which Ricardian equivalence does not hold have practical importance in at least two respects. First, credit market imperfections, or “ frictions," which cause Ricardian equivalence to fail, are key to und Ebook Microeconomics (6/E): Part 2erstanding some important features of how credit markets work. For example, in practice the interest rales al which consumers and firms can lend arc lEbook Microeconomics (6/E): Part 2
ower than the interest rales at which they can borrow, consumers and firms cannot always borrow up to the quantity they would like al market interest www.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2sing because of credit market frictions.In this chapter, we wall study two types of credit market frictions: asymmetric information and limited commitment. Asymmetric information refers to a situation where, in a particular market, some market participant knows more about his or her own characterist Ebook Microeconomics (6/E): Part 2ics than do other market participants. In the credit market context we examine, asymmetric information exists in that a particular borrower knows moreEbook Microeconomics (6/E): Part 2
about his or her own cred it worthiness than do potential lenders. This credit market friction then leads to differences between the interest rates awww.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2owers will default on their loans. Even good borrowers who will not default must pay the default premium, as lenders arc unable to distinguish between good and bad borrowers. Asymmetric information is an inipor lanl element that we can use to help understand the 2008 2009 financial crisis, and other Ebook Microeconomics (6/E): Part 2 such financial crises, which arc characterized by dramatic increases in interest rale spreads. These interest rale spreads arc gaps between the interEbook Microeconomics (6/E): Part 2
est rales on risky loans and safer loans, or between the rates of interest at which some class of borrowers can lend and liorrow'. As well, during thewww.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2elp explain.A second credit market friction, limited commitment, refers to situations in which it is impossible for a market participant to commit in advance to some future action, ỉn credit markets, there can be lack of commitment in the sense that a borrow'd’ cannot commit to repaying a loan. Give Ebook Microeconomics (6/E): Part 2n the choice, a rational borrower would choose to default on a loan if there were no penally for doing so. A typical incentive device used by lendersEbook Microeconomics (6/E): Part 2
to prevent this type of strategic default IS the posting of collateral. Indeed, most lending in credit markets is collateralized. For example, in conswww.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2'ilh a car loan, the car sen es as collateral against the loan. When collateral is posted as part of a credit contract, the borrower gives the lender the right to seize the collateral in the event that the borrower defaults on the loan.Limited commitment can lead to situations W'here consumers are c Ebook Microeconomics (6/E): Part 2onstrained in their borrowing by how' much wealth they have that can serve as collateral—their collateralizable wealth For a typical consumer, collateEbook Microeconomics (6/E): Part 2
ralizable wealth is restricted to houses and cars, but could potentially include other assets. If a consumer iswww.downloadslide.netCredit Market Impewww.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2ter for how much they can consume in the present. This effect mattered, for example, during the period leading up to the 2008-2009 financial crisis, when there was a large decrease in the price of housing, which acted to reduce consumer expenditure. From the late 1990s until the peak in housing pric Ebook Microeconomics (6/E): Part 2es in the United States in 2006. a significant fraction of consumer expenditure was financed by borrowing, through mortgages and home equity loans, usEbook Microeconomics (6/E): Part 2
ing housing as collateral. With the decrease in housing prices in the United Stales that began in 2006, the value of collateralizable wealth in the U.www.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2hapter.A second aspect in which the failure of Ricardian equivalence has practical significance, in addition to credit market frictions, relates to the market failure that creates a role for social security programs. Government social security programs typically mandate some level of saving by the w Ebook Microeconomics (6/E): Part 2orking-age population in order to provide for benefits to retirees. It might seem that such programs can only make US worse off, since rational consumEbook Microeconomics (6/E): Part 2
ers know best howr to save for their own retirement. However, government-provided social security can be rationalized by appealing to a credit market www.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2mes are not efficient, rhe first welfare theorem (sec Chapter 5) does not hold, and there is a role for government in transferring resources across generations- taxing the w orking-age population to pay benefits to retirees through social security. We explore flow social security works, and the effe Ebook Microeconomics (6/E): Part 2cts of alternative types of social security programs, in this chapter. A key policy issue with respect to social security is the “privatization" of soEbook Microeconomics (6/E): Part 2
cial security; that is, the replacement of “pay-as-you-go” systems with ■■ fully funded” programs. We will study this issue in detail.353Credit Marketwww.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2rst step in the analysis of credit market imperfections is to show how Ricardian equivalence fails with a standard type of credit market friction—a gap between the interest rales al which a consumer can lend and borrow. 1 lore, we will start with the basic credit market model from Chapter 9, where a Ebook Microeconomics (6/E): Part 2n individual consumer lives for two periods, the current and future period. The consumer receives income y in the current period, y'm the future perioEbook Microeconomics (6/E): Part 2
d, and consumes c and c' in the current and future periods, respectively. The consumer’s savings in the current period is denoted by s.We want to showwww.downloadslide.netChapter 1 0Credit Market Imperfections: Credit Frictions, Financial Crises, and Social SecurityLearning ObjectivesAfter studying Ebook Microeconomics (6/E): Part 2perfect credit markets. Consider a consumer who lends at a real interest rate q and borrows at a real interest rate r2, where r2 > r|. This difference in borrowing and lending rates of interest arises in practice, for example, when borrowing and lending is354www.downloadslide.netPart IV Savings. Inv Ebook Microeconomics (6/E): Part 2estment, and Government Deficitscarried out through banks, and it is costly for banks to sort credit risks. If the bank borrows from lenders (depositoEbook Microeconomics (6/E): Part 2
rs in the bank) al the real interest rate rb and it makes loans at the real interest rate r2, the difference r2 - n > 0 could arise in equilibrium toGọi ngay
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