IDEAS home Printed from https://ideas.repec.org/p/red/sed015/199.html
   My bibliography  Save this paper

Endogenous Uncertainty and Credit Crunches

Author

Listed:
  • Robert Ulbricht

    (Toulouse School of Economics)

  • Ludwig Straub

    (MIT)

Abstract

This paper examines the relationship between uncertainty and financial crises. In particular, we present a model where the amount of funding a firm receives depends on how financial markets assess the firm's business conditions. Financial agents endogenously learn about a firm's business conditions from local business indicators, but financial constraints impair the usefulness of this information when a firm is short of funds. This is because financially constrained firms respond less to their private information, reducing the informativeness of business indicators. As a result, a temporary aggregate shock to the economy's financial capacity causes a persistent cycle of uncertainty and financial constraints, where financial markets grow increasingly uncertain about firms without funding. While this feedback loop bears little effect on firms with access to funds, the severe effects it has on constrained firms generate a deep and long-lasting aggregate recession, characterized by an increased misallocation of credit, an increased cross-sectional dispersion of output across firms, and highly volatile and pessimistic financial markets.

Suggested Citation

  • Robert Ulbricht & Ludwig Straub, 2015. "Endogenous Uncertainty and Credit Crunches," 2015 Meeting Papers 199, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:199
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2015/paper_199.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Yuliy Sannikov, 2014. "A Macroeconomic Model with a Financial Sector," American Economic Review, American Economic Association, vol. 104(2), pages 379-421, February.
    2. Kathy Yuan, 2005. "Asymmetric Price Movements and Borrowing Constraints: A Rational Expectations Equilibrium Model of Crises, Contagion, and Confusion," Journal of Finance, American Finance Association, vol. 60(1), pages 379-411, February.
    3. Ana Fostel & John Geanakoplos, 2012. "Leverage and Default in Binomial Economies: A Complete Characterization," Cowles Foundation Discussion Papers 1877RRR, Cowles Foundation for Research in Economics, Yale University, revised Mar 2015.
    4. Thomas Chaney & David Sraer & David Thesmar, 2012. "The Collateral Channel: How Real Estate Shocks Affect Corporate Investment," American Economic Review, American Economic Association, vol. 102(6), pages 2381-2409, October.
    5. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116-159.
    6. Aubhik Khan & Julia K. Thomas, 2013. "Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity," Journal of Political Economy, University of Chicago Press, vol. 121(6), pages 1055-1107.
    7. Bartosz Maćkowiak & Mirko Wiederholt, 2015. "Business Cycle Dynamics under Rational Inattention," Review of Economic Studies, Oxford University Press, vol. 82(4), pages 1502-1532.
    8. Venky Venkateswaran & Laura Veldkamp & Julian Kozlowski, 2015. "The Tail that Wags the Economy: Belief-Driven Business Cycles and Persistent Stagnation," 2015 Meeting Papers 800, Society for Economic Dynamics.
    9. Simon Gilchrist & Egon Zakrajsek & Cristina Fuentes Albero & Dario Caldara, 2013. "On the Identification of Financial and Uncertainty Shocks," 2013 Meeting Papers 965, Society for Economic Dynamics.
    10. Benjamin Moll, 2014. "Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation?," American Economic Review, American Economic Association, vol. 104(10), pages 3186-3221, October.
    11. Joel M. David & Hugo A. Hopenhayn & Venky Venkateswaran, 2016. "Information, Misallocation, and Aggregate Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 131(2), pages 943-1005.
    12. James H. Stock & Mark W. Watson, 2012. "Disentangling the Channels of the 2007-09 Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 81-156.
    13. Tarek A. Hassan & Thomas M. Mertens, 2017. "The Social Cost of Near-Rational Investment," American Economic Review, American Economic Association, vol. 107(4), pages 1059-1103, April.
    14. Gabriel Jimenez & Steven Ongena & Jose-Luis Peydro & Jesus Saurina, 2012. "Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications," American Economic Review, American Economic Association, vol. 102(5), pages 2301-2326, August.
    15. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts," American Economic Review, American Economic Association, vol. 105(8), pages 2644-2678, August.
    16. Bachmann, Ruediger & Bayer, Christian, 2009. "Firm-specific productivity risk over the business cycle: facts and aggregate implications," Discussion Paper Series 1: Economic Studies 2009,15, Deutsche Bundesbank.
    17. Tatsuro Senga, 2014. "A New Look at Uncertainty Shocks: Imperfect Information and Misallocation," UTokyo Price Project Working Paper Series 042, University of Tokyo, Graduate School of Economics.
    18. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    19. Backus, David & Ferriere, Axelle & Zin, Stanley, 2015. "Risk and ambiguity in models of business cycles," Journal of Monetary Economics, Elsevier, vol. 69(C), pages 42-63.
    20. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 645-700.
    21. Gaetano Gaballo & Ryan Chahrour, 2015. "On the Nature and Stability of Sentiments," 2015 Meeting Papers 469, Society for Economic Dynamics.
    22. Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2015. "The Tail that Wags the Economy: Beliefs and Persistent Stagnation," NBER Working Papers 21719, National Bureau of Economic Research, Inc.
    23. Ryan Chahrour & Manoj Atolia, 2015. "Intersectoral Linkages, Diverse Information, and Aggregate Dynamics in a Neoclassical Model," 2015 Meeting Papers 398, Society for Economic Dynamics.
    24. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    25. Ruediger Bachmann & Giuseppe Moscarini, 2011. "Business Cycles and Endogenous Uncertainty," 2011 Meeting Papers 36, Society for Economic Dynamics.
    26. Siemer, Michael, 2014. "Firm Entry and Employment Dynamics in the Great Recession," Finance and Economics Discussion Series 2014-56, Board of Governors of the Federal Reserve System (US).
    27. Jennifer La'O, 2010. "Collateral Constraints and Noisy Fluctuations," 2010 Meeting Papers 780, Society for Economic Dynamics.
    28. Bachmann, Rüdiger & Bayer, Christian, 2013. "‘Wait-and-See’ business cycles?," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 704-719.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Richter, Alexander W. & Throckmorton, Nathaniel, 2017. "A New Way to Quantify the Effect of Uncertainty," Working Papers 1705, Federal Reserve Bank of Dallas, revised 23 Feb 2018.
    2. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37/2017, Bank of Finland.
    3. Pablo D. Fajgelbaum & Edouard Schaal & Mathieu Taschereau-Dumouchel, 2017. "Uncertainty Traps," The Quarterly Journal of Economics, Oxford University Press, vol. 132(4), pages 1641-1692.
    4. Gaetano Gaballo, 2016. "Rational Inattention to News: The Perils of Forward Guidance," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 42-97, January.
    5. repec:eee:inecon:v:111:y:2018:i:c:p:143-158 is not listed on IDEAS
    6. Hikaru Saijo & Cosmin Ilut, 2015. "Learning, Confidence, and Business Cycles," 2015 Meeting Papers 917, Society for Economic Dynamics.
    7. Straub, Ludwig & Ulbricht, Robert, 2016. "Endogenous Second Moments: A Unified Approach to Fluctuations in Risk, Dispersion, and Uncertainty," TSE Working Papers 16-664, Toulouse School of Economics (TSE), revised Mar 2018.
    8. Vladimir Asriyan & Luc Laeven & Alberto Martin, 2018. "Collateral booms and information depletion," Economics Working Papers 1622, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2019.
    9. Brendon, Charles & Corsetti, Giancarlo, 2016. "COEURE Survey: Fiscal and Monetary Policies after the Crises," CEPR Discussion Papers 11088, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed015:199. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.