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Informational Imperfections in the Capital Market and Macro-Economic Fluctuations

  • Bruce C. Greenwald
  • Joseph E. Stiglitz
  • Andrew Weiss

This paper describes the role that informational imperfections in capital markets are likely to play in business cycles. It then developes a simple illustrative model of the impact of adverse selection in the equity market and the way in which this may lead to large fluctuations in the effective cost of capital in response to relatively small demand shocks. The model also derives an expression for the cost of equity capital in the presence of adverse selection and provides informational explanations for several widely observed macro-economic phenomena.

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File URL: http://www.nber.org/papers/w1335.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1335.

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Date of creation: Apr 1984
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Publication status: published as Greenwald, Bruce, Joseph E. Stiglitz and Anfrew Weiss. "Informational Imperfections in the Capital Market and Macro-Economic Fluctuations." American Economic Review, Vol. 74, No. 2, (May 1984), pp. 194-199.
Handle: RePEc:nbr:nberwo:1335
Note: PE
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  1. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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