The Information Driven Financial Accelerator

75 Pages Posted: 17 Oct 2019 Last revised: 9 Nov 2020

See all articles by Antonio Falato

Antonio Falato

Board of Governors of the Federal Reserve System

Jasmine Xiao

University of Notre Dame - Department of Economics

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

Falato, Antonio and Xiao, Jasmine, The Information Driven Financial Accelerator (November 8, 2020). Available at SSRN: https://ssrn.com/abstract=3465336 or http://dx.doi.org/10.2139/ssrn.3465336

Antonio Falato (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jasmine Xiao

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

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