Flight-to-Quality Cycles and the Real Economy

Péter Kondor and Maryam Farboodi
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Maryam Farboodi: Princeton University

No 1168, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper, we build a novel model of flight-to-quality cycles and investment. We show that informational frictions can lead to flight-to-quality cycles. Also, this fluctuation leads to diverse investment decisions where the issuers who are perceived as low types under-invest ex-ante, and inefficiently liquidate projects ex-post. The smaller is the ex-ante probability of a flight-to-quality event, the larger is the ex-post spread and the inefficient liquidation.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1168

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