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Endogenous Uncertainty and Credit Crunches

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  • Straub, Ludwig
  • Ulbricht, Robert

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, causing a persistent cycle of uncertainty, pessimistic expectations, and financial constraints. Through this channel, a temporary shortage of funds can develop into a long-lasting funding problem for firms. Financial crises are characterized by increased credit misallocation, volatile asset prices, high risk premia, an increased cross-sectional dispersion of returns, and high levels of disagreement among forecasters. A numerical example suggests that the proposed channel may significantly delay recovery from financial shocks.

Suggested Citation

  • Straub, Ludwig & Ulbricht, Robert, 2015. "Endogenous Uncertainty and Credit Crunches," TSE Working Papers 15-604, Toulouse School of Economics (TSE), revised Dec 2017.
  • Handle: RePEc:tse:wpaper:29800
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    Cited by:

    1. Isaac Baley & Ana Figueiredo & Robert Ulbricht, 2018. "Mismatch Cycles," 2018 Meeting Papers 1098, Society for Economic Dynamics.
    2. Gene Ambrocio, 2020. "Rational exuberance booms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 263-282, January.
    3. Hikaru Saijo & Cosmin Ilut, 2015. "Learning, Confidence, and Business Cycles," 2015 Meeting Papers 917, Society for Economic Dynamics.
    4. Alexander W. Richter & Nathaniel A. Throckmorton, 2017. "A New Way to Quantify the Effect of Uncertainty," Working Papers 1705, Federal Reserve Bank of Dallas.
    5. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37/2017, Bank of Finland.
    6. Claudio Michelacci & Luigi Paciello, 2020. "Aggregate Risk or Aggregate Uncertainty? Evidence from UK Households," EIEF Working Papers Series 2006, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2020.
    7. Vladimir Asriyan & Luc Laeven & Alberto Martín, 2022. "Collateral Booms and Information Depletion [Rational Exuberance Booms]," Review of Economic Studies, Oxford University Press, vol. 89(2), pages 517-555.
    8. Straub, Ludwig & Ulbricht, Robert, 2019. "Endogenous second moments: A unified approach to fluctuations in risk, dispersion, and uncertainty," Journal of Economic Theory, Elsevier, vol. 183(C), pages 625-660.
    9. Straub, Ludwig & Ulbricht, Robert, 2015. "Endogenous Uncertainty and Credit Crunches," TSE Working Papers 15-604, Toulouse School of Economics (TSE), revised Dec 2017.
    10. 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.
    11. Albagli, Elias & Hellwig, Christian & Tsyvinski, Aleh, 2021. "Information Aggregation and Asymmetric Returns," TSE Working Papers 21-1172, Toulouse School of Economics (TSE), revised Jun 2022.
    12. Vladimir Asriyan & Luc Laeven & Alberto Martín, 2018. "Collateral Booms and Information Depletion," Working Papers 1064, Barcelona School of Economics.
    13. 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.
    14. Kyriakos T. Chousakos & Gary B. Gorton & Guillermo Ordoñez, 2020. "The Macroprudential Role of Stock Markets," NBER Working Papers 27113, National Bureau of Economic Research, Inc.
    15. Joshua Bernstein & Alexander W. Richter & Nathaniel A. Throckmorton, 2021. "Nonlinear Search and Matching Explained," Working Papers 2106, Federal Reserve Bank of Dallas.
    16. Gete, Pedro & Melkadze, Givi, 2018. "Aggregate volatility and international dynamics. The role of credit supply," Journal of International Economics, Elsevier, vol. 111(C), pages 143-158.
    17. Tyler Atkinson & Michael Plante & Alexander Richter & Nathaniel Throckmorton, 2022. "Complementarity and Macroeconomic Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 225-243, April.
    18. Brendon, Charles & Corsetti, Giancarlo, 2016. "COEURE Survey: Fiscal and Monetary Policies after the Crises," CEPR Discussion Papers 11088, C.E.P.R. Discussion Papers.
    19. Joshua Bernstein & Michael D. Plante & Alexander W. Richter & Nathaniel A. Throckmorton, 2021. "Countercyclical Fluctuations in Uncertainty are Endogenous," Working Papers 2109, Federal Reserve Bank of Dallas.
    20. Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2021. "Dispersed Information and Asset Prices," Working Papers hal-03118639, HAL.

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    More about this item

    Keywords

    Belief traps; credit crunches; dispersed information; endogenous uncertainty; internal persistence of financial shocks; resource misallocation;
    All these keywords.

    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

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