Financial Market Imperfections and Business Cycles

49 Pages Posted: 23 Apr 2004 Last revised: 13 Dec 2008

See all articles by Bruce C. N. Greenwald

Bruce C. N. Greenwald

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: 1988

Abstract

This paper develops a simple model of macroeconomic behavior which incorporates the impact of financial market "imperfections," such as those generated by asymmetric information in financial markets. These information asymmetries may lead to breakdowns in markets, like that for equity, in which risks arm shared. In particular, we analyze firm behavior in the presence of equity rationing and imperfect futures markets, in which there are lags in production. Aft a consequence, firms act in a risk-averse manner. We trace out the macroeconomic consequences, and show that they are able to account for many of the widely observed aspects of actual business cycles.

Suggested Citation

Greenwald, Bruce and Stiglitz, Joseph E., Financial Market Imperfections and Business Cycles (1988). NBER Working Paper No. w2494. Available at SSRN: https://ssrn.com/abstract=288469

Bruce Greenwald (Contact Author)

Columbia Business School - Finance and Economics ( email )

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Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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