Inequality and Asset Fire Sales

It is widely acknowledged that fire sales were a critical factor in inducing and exacerbating the financial crises of 2007--2008. The leverage intermediaries, which defined as ratio total assets to capital, key causing sales. Why do intermediaries expand their balance sheets despite subsequently having sell at discounted prices? To examine this question, we incorporate into three-period incomplete market economy model, households face countercyclical uninsured idiosyncratic income shocks. We demonstrate inequality incompleteness result leveraged investment subsequent asset by equilibrium. first contribution paper mechanism between prices leverages could successfully solve famed asset-pricing puzzles. The second analyze impact regulation on welfare ex ante homogeneous households.