Endogenous Uncertainty and Credit Crunches

No 1036, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We develop a theory of endogenous uncertainty in which the ability of investors to learn about firm-level fundamentals is impaired during financial crises. At the same time, higher uncertainty reinforces financial distress. Through this two-way feedback loop, a temporary financial shock can cause a persistent reduction in risky lending, output, and employment that coincides with increased uncertainty, default rates, credit spreads and disagreement among forecasters. We embed our mechanism into standard real business cycle and New-Keynesian models and show how it generates endogenous and internally persistent processes for the efficiency and labor wedges.

Keywords: Endogenous uncertainty; financial crises; internal persistence (search for similar items in EconPapers)
JEL-codes: D83 E32 E44 G01 (search for similar items in EconPapers)
Date: 2020-06-26, Revised 2023-01-13
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-mac and nep-ore
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Related works:
Working Paper: Endogenous Uncertainty and Credit Crunches (2017)
Working Paper: Endogenous Uncertainty and Credit Crunches (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:1036

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