Fed paper explores information problems in financial panics

credit-cycle

Information problems worsen during financial panics, generating further instability, research published by the Federal Reserve finds.

Levent Altinoglu and Jin-Wook Chang explore the role of asset prices in imperfectly conveying private information held by lenders and borrowers. They build a model in which investors’ beliefs about fundamental conditions are shaped endogenously by the availability of liquidity in funding and asset markets.

As liquidity declines (or becomes excessive), hints from

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