Asset Quality Cycles

48 Pages Posted: 1 Oct 2016 Last revised: 13 Mar 2018

See all articles by Masao Fukui

Masao Fukui

Massachusetts Institute of Technology (MIT)

Date Written: December 1, 2017


Systemic risk builds up during booms in an economy featuring asymmetric information in asset markets, where investors' hidden effort choices endogenously determine asset quality distribution. Higher asset prices during booms induce more investors to sell their assets, which lowers their incentive to improve quality. This quality deterioration in turn makes the economy vulnerable to future exogenous shocks because market breakdowns become more likely. Private agents do not internalize that their effort choices worsen future adverse selection problems, and thus the planner may improve welfare by taxing trade and thereby lowering asset prices.

Keywords: Macroeconomics, Business Cycle, Adverse Selection, Moral Hazard, Endogenous Quality

JEL Classification: D82, E32, E44

Suggested Citation

Fukui, Masao, Asset Quality Cycles (December 1, 2017). Journal of Monetary Economics, Forthcoming, Available at SSRN: or

Masao Fukui (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

Cambridge, MA
United States

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