Theories on Credit Market, Credit Risk and Economic Activity

Abstract

The next part deals with the credit market, credit market risk and economic activity. Historically, borrowing and lending have been considered essential for economic activity. The major issues in borrowing and lending theory were already present in the works of the classical economists such as Adam Smith, David Ricardo and Alfred Marshall. The Ricardian equivalence theorem, a modern reformulation of a statement by David Ricardo, has, in the theory of perfect capital markets, become a major issue in modern finance.We will discuss the theory of perfect capital markets and imperfect capital markets. In the latter, asymmetric information, moral hazard and adverse selection as well as asset prices become relevant issues for studying borrowing and lending. Subsequently, this will be applied to the finance of firms, households, governments and countries.