Download This PaperThe Information Driven Financial Accelerator
75 Pages Posted: 17 Oct 2019 Last revised: 9 Nov 2020
Date Written: November 8, 2020
Abstract
Imperfect information in credit markets is a quantitatively important source of macroeconomic fragility. We calibrate a dynamic model with uninformed debt investors. A deterioration in the profit outlook makes investors pessimistic about firm creditworthiness. In turn, firms perceive that debt is underpriced and cut back investment. We show that: 1) the model matches the size and cyclical variation of credit spreads; 2) imperfect information accounts for about half of the spike in spreads and one-fifth of the contraction in aggregate investment during the US financial crisis; 3) the economic costs of imperfect information for firm value and investment are substantial.
Keywords: learning, credit market volatility, business cycles
JEL Classification: E32, E44, G12
Suggested Citation: Suggested Citation
Antonio Falato (Contact Author)
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States