Working Paper: NBER ID: w27113
Authors: Kyriakos T. Chousakos; Gary B. Gorton; Guillermo Ordoñez
Abstract: A financial crisis is an event of sudden information acquisition about the collateral backing short-term debt in credit markets. When investors see a financial crisis coming, however, they react by more intensively acquiring information about firms in stock markets, revealing those that are weaker, which as a consequence end up cut off from credit. This cleansing effect of stock markets’ information on credit markets’ composition discourage information acquisition about the collateral of the firms remaining in credit markets, slowing down credit growth and potentially preventing a crisis. Production of information in stock markets, then, acts as a macroprudential tool in the economy.
Keywords: stock markets; credit markets; financial crises; information production; macroprudential tool
JEL Codes: E32; E44; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Production of information in stock markets (G14) | Identification of weaker firms (L10) |
| Identification of weaker firms (L10) | Firms being cut off from credit (G21) |
| Lack of information production about collateral in credit markets (D83) | Increase in available credit (E51) |
| Increase in available credit (E51) | Promotion of economic output (E23) |
| Increase in available credit (E51) | Induces fragility due to lower project quality (L15) |
| Increased information in stock markets (G14) | Reduced future credit growth (F65) |
| Stock markets act as a macroprudential tool (E44) | Slowing down credit growth (E51) |