Learning About Banks' Net Worth and the Slow Recovery after the Financial Crisis

49 Pages Posted: 17 Oct 2016  

Josef Hollmayr

Goethe University Frankfurt

Michael Kuehl

Deutsche Bundesbank - Economics Department

Date Written: 2016

Abstract

In this paper, we examine the influence of information rigidities concerning the net worth of banks on the real economy over time. In a first part, we show empirically that expectations about the net earnings of banks (as growth of net worth) are truly biased, particularly during the financial crisis. The forecast error of professional investors cannot be attributed to sticky information but rather to noisy information. Investors display a learning behavior with regard to past forecast errors in forming their expectations about future earnings during the crisis. In a second part, by drawing on a New Keynesian general equilibrium model with a banking sector, we demonstrate that, by quantitatively incorporating this type of information updating and expectations formation about the net worth of banks, noisy information can produce a slow recovery compared to a full information rational expectation case.

Keywords: DSGE Model, Survey Data, Imperfect Information, Learning, Slow Recovery

JEL Classification: E3, E44

Suggested Citation

Hollmayr, Josef and Kuehl, Michael, Learning About Banks' Net Worth and the Slow Recovery after the Financial Crisis (2016). Bundesbank Discussion Paper No. 39/2016. Available at SSRN: https://ssrn.com/abstract=2852977

Josef Hollmayr (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Michael Kühl

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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