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Asset Measurement , Real Effects and the Financial Accelerator

This paper examines two questions: When should we expect asset measurements to contribute to macroeconomic fluctuations? Should regulators adapt the measurement to financial shocks? We develop a model in which firms borrow funds subject to collateral constraints and implement an ex-anteasset measurement rule. In this environment, we characterize the nature of optimal measurements and analyze their interaction with interest rates and financial shocks. Under certain conditions, impairment accounting contributes to the financial accelerator, magnifying the effect of financial shocks on investment. A regulatory process that ignores the dependence of the interest rate on the measurement might select a rule inefficient in the aggregate, with excessive reliance on impairment accounting and forced liquidations . ∗J. Bertomeu is from Baruch College, City University of New York, One Bernard Baruch Way, New York, NY 10010. J. Bertomeu acknowledges financial support from the PSC-CUNY research fund. †Contact author: ec2694@columbia.edu. Tel: (212)-851-5863. Fax: (212)-316-9219. Columbia Business School, Columbia University, 3022 Broadway, New York, NY 10027. We have received helpful comments from participants at workshops at Columbia University, Carnegie Mellon University, Rutgers University and the University of Basel.