Topic:

Delayed Crises and Slow Recoveries

Time&Date: 

15:00-16:30, 2020/11/20 (Friday)

Speaker:

Prof. Xuewen Liu (Hong Kong University)

Abstract:

We present a rational expectations model of credit-driven crises, providing a new perspective to explain why credit booms can lead to severe financial crises and aftermath slow economic recoveries. In our model economy, banks can operate in two types of business à la Minsky's narratives. They are sequentially aware of the deterioration of fundamentals of the speculative business and decide whether to continue credit extension in that business or liquidate capital and move into the traditional business. However, because individual banks face uncertainty about how many of their peers have been aware, they rationally choose to extend credit in the speculative business for a longer time than is socially optimal, leading to an over-delayed crisis and consequently more banks being caught by the crisis. This in turn renders the financial crisis more severe and the subsequent economic recovery slower. Within a standard textbook macroeconomic growth setting, our model generates rich dynamics of economic booms, slowdowns, crashes, and recoveries.

Bio:

Professor Xuewen Liu is currently a full professor at HKU. Prior to joining HKU, he was an associate professor (with tenure) and an assistant professor at HKUST and was an assistant professor at Imperial College Business School. He obtained his Ph.D. degree at London School of economics (LSE).  Professor Liu is an economic theorist. His research areas include financial economics (financial institutions and financial crises), macroeconomics, growth and development, and Chinese economy. Professor Liu has published in leading finance and economics journals, such as Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Journal of Economic Theory, Journal of Monetary economics.