Endogenous Uncertainty and Credit Crunches
Ludwig Straub and
No 15-604, TSE Working Papers from Toulouse School of Economics (TSE)
We develop a theory of endogenous uncertainty where the ability of investors to learn about firm-level fundamentals declines during financial crises. At the same time, higher uncertainty reinforces financial distress, causing a persistent cycle of uncertainty, pessimistic expectations, and financial constraints. Through this channel, a temporary shortage of funds can develop into a long-lasting funding problem for firms. Financial crises are characterized by increased credit misallocation, volatile asset prices, high risk premia, an increased cross-sectional dispersion of returns, and high levels of disagreement among forecasters. A numerical example suggests that the proposed channel may significantly delay recovery from financial shocks.
Keywords: Belief traps; credit crunches; dispersed information; endogenous uncertainty; internal persistence of financial shocks; resource misallocation (search for similar items in EconPapers)
JEL-codes: D83 E32 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2015-10, Revised 2017-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14) Track citations by RSS feed
Downloads: (external link)
https://www.tse-fr.eu/sites/default/files/TSE/docu ... /2015/wp_tse_604.pdf Full text (application/pdf)
Working Paper: Endogenous Uncertainty and Credit Crunches (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:29800
Access Statistics for this paper
More papers in TSE Working Papers from Toulouse School of Economics (TSE) Contact information at EDIRC.
Bibliographic data for series maintained by ().