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Financial Market Imperfections and Business Cycles

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Author Info
Bruce C. Greenwald
Joseph E. Stiglitz

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2494.

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Date of creation: May 1993
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Publication status: published as The Quarterly Journal of Economics, Vol. 108, pp. 77-114 (February 1993).
Handle: RePEc:nbr:nberwo:2494

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