THE DYNAMICS OF CREDIT MARKETS IN A MODEL WITH LEARNING

A dynamic credit market is modeled in which the production and processing of information leads to alternating and persistent periods of growth and contraction. In the model, the number of projects engaged in determines the precision of estimates of future returns obtained from current investment. Shocks to underlying returns to risky projects are magnified and prolonged by the learning process. Multiple equilibria may exist and the magnification effect may be even larger since shocks can move the credit market to a new equilibrium. The allocation of credit is generally not a constrained Pareto-efficient allocation. © 1990.