Imperfect information transmission from banks to investors: Macroeconomic implications

Nicolás Figueroa, Oksana Leukhina and Carlos Ramírez

Journal of Monetary Economics, 2021, vol. 118, issue C, 87-98

Abstract: Our goal is to elucidate the interaction of banks’ screening effort and strategic information production in loan-backed asset markets using a general equilibrium framework. Asset quality is unobserved by investors, but banks may purchase error-prone ratings. The premium paid on highly rated assets emerges as the main determinant of banks’ screening effort. The fact that rating strategies reflect banks’ private information about asset quality helps keep this premium high. Conventional regulatory policies interfere with this decision margin, thereby reducing signaling value of high ratings and exacerbating the credit misallocation problem. We propose a tax/subsidy scheme that induces efficiency.

Keywords: Credit misallocation; Screening effort; Information asymmetry; Information production; Strategic rating; Rating agencies; Mandatory rating; Mandatory ratings disclosure (search for similar items in EconPapers)
JEL-codes: G01 G24 G28 (search for similar items in EconPapers)
Date: 2021
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Related works:
Working Paper: Imperfect Information Transmission from Banks to Investors: Macroeconomic Implications (2019)
Working Paper: Imperfect Information Transmission from Banks to Investors: Macroeconomic Implications (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:118:y:2021:i:c:p:87-98

DOI: 10.1016/j.jmoneco.2019.12.002

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