Forbearance impedes confidence recovery

Keiichiro Kobayashi

Research output: Contribution to journalArticle

Abstract

The finding that countries that take a slow approach to reform during a financial crisis run into problems of persistent stagnation is usually explained as follows: forbearance policy (i.e., an implicit subsidy to inefficient sectors) distorts resource allocation, causing a supply shortage of resources to the productive sectors. I propose another explanation: forbearance impedes the recovery of confidence that is lost during a financial crisis. If confidence is restored through Bayesian learning by economic agents based on observations of government actions, then the inaction of the government (forbearance) impedes Bayesian learning. The model shows that forbearance policy delays economic recovery.

Original languageEnglish
Pages (from-to)178-188
Number of pages11
JournalJournal of Macroeconomics
Volume29
Issue number1
DOIs
Publication statusPublished - 2007 Mar 1

Keywords

  • Bayesian learning
  • Confidence
  • Financial crises
  • Forbearance policy

ASJC Scopus subject areas

  • Economics and Econometrics

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