Working Paper: NBER ID: w2494
Authors: Bruce C. Greenwald; Joseph E. Stiglitz
Abstract: This paper develops a simple model of macroeconomic behavior which incorporates the impact of financial market "imperfections," such as those generated by asymmetric information in financial markets. These information asymmetries may lead to breakdowns in markets, like that for equity, in which risks arm shared. In particular, we analyze firm behavior in the presence of equity rationing and imperfect futures markets, in which there are lags in production. Aft a consequence, firms act in a risk-averse manner. We trace out the macroeconomic consequences, and show that they are able to account for many of the widely observed aspects of actual business cycles.
Keywords: financial market imperfections; business cycles; equity rationing; asymmetric information
JEL Codes: E32; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial market imperfections (G19) | equity rationing (D45) |
| equity rationing (D45) | firms' ability to raise funds (G32) |
| firms' ability to raise funds (G32) | economic activity (E20) |
| unexpected shocks (D80) | economic activity (E20) |
| fluctuations in net asset balances (F32) | economic activity (E20) |
| increased uncertainty regarding future prices (D89) | marginal bankruptcy risks (G33) |
| marginal bankruptcy risks (G33) | investment (G31) |
| investment (G31) | output (C67) |