| Date: |
2017 |
| Abstract: |
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 of firms, giving rise to "belief traps" - a persistent cycle of uncertainty, pessimistic expectations, and financial constraints, through which a temporary shortage of funds can develop into a long-lasting funding problem for firms. At the macro-level, belief traps can explain why financial crises can result in long-lasting recessions. In our model, financial crises are characterized by high levels of credit misallocation, an increased cross-sectional dispersion of growth rates, endogenously increased pessimism, uncertainty and disagreement among investors, highly volatile asset prices, and high risk premia. A calibration of our model to U. S. micro data on investor beliefs explains a considerable fraction of the slow recovery after the 08/09 crisis. |
| Abstract: |
The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396. |
| Grants: |
European Commission 649396
|
| Rights: |
Aquest document està subjecte a una llicència d'ús Creative Commons. Es permet la reproducció total o parcial, la distribució, la comunicació pública de l'obra i la creació d'obres derivades, fins i tot amb finalitats comercials, sempre i quan es reconegui l'autoria de l'obra original.  |
| Language: |
Anglès |
| Series: |
Barcelona Graduate School of Economics. ADEMU working paper series |
| Series: |
ADEMU Working Paper Series ; 65 |
| Document: |
Working paper |
| Subject: |
Belief traps ;
Credit crunches ;
Dispersed information ;
Endogenous uncertainty ;
Internal persistence of financial shocks ;
Resource misallocation |
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