The Expectations Driven Financial Accelerator
55 Pages Posted: 17 Oct 2019
Date Written: October 7, 2019
This paper develops a unified quantitative account of credit cycles and their macroeconomic consequences based on information frictions in debt markets. Using a dynamic model with endogenous default, we highlight a novel “herding” mechanism whereby uninformed debt investors learn about firms’ creditworthiness from publicly-available survey information on quarter-ahead corporate profits. We show that: 1) short-term changes in expectations of corporate profits strongly forecast credit spreads and real economic aggregates over up to two years horizons; 2) credit spreads and defaults are counter-cyclical; 3) the mechanism can account quantitatively for the historically large spike in spreads during the financial crisis.
Keywords: expectations, survey forecasts, bond pricing, business cycles
JEL Classification: D84, G12, G30, E32
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