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Flight-to-Quality Cycles and the Real Economy

Author

Listed:
  • Peter Kondor

    (London School of Economics)

  • Maryam Farboodi

    (Princeton University)

Abstract

In this paper, we build a novel model of flight-to-quality cycles and investment. We show that informational frictions can lead to flight-to-quality cycles. Also, this fluctuation leads to diverse investment decisions where the issuers who are perceived as low types under-invest ex-ante, and inefficiently liquidate projects ex-post. The smaller is the ex-ante probability of a flight-to-quality event, the larger is the ex-post spread and the inefficient liquidation.

Suggested Citation

  • Peter Kondor & Maryam Farboodi, 2017. "Flight-to-Quality Cycles and the Real Economy," 2017 Meeting Papers 1168, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1168
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