The Macroprudential Role of Stock Markets / Kyriakos T. Chousakos, Gary B. Gorton, Guillermo Ordoñez.

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Chousakos, Kyriakos T

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w27113.Publication details: Cambridge, Mass. National Bureau of Economic Research 2020.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: A financial crisis is an event of sudden information acquisition about the collateral backing short-term debt in credit markets. When investors see a financial crisis coming, however, they react by more intensively acquiring information about firms in stock markets, revealing those that are weaker, which as a consequence end up cut off from credit. This cleansing effect of stock markets' information on credit markets' composition discourage information acquisition about the collateral of the firms remaining in credit markets, slowing down credit growth and potentially preventing a crisis. Production of information in stock markets, then, acts as a macroprudential tool in the economy.

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Working Paper	Biblioteca Digital	Colección NBER	nber w27113 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w27110 Social Security Wealth, Inequality, and Lifecycle Saving /	nber w27111 An Economic Approach to Regulating Algorithms /	nber w27112 Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength /	nber w27113 The Macroprudential Role of Stock Markets /	nber w27114 The Effect of the U.S.-China Trade War on U.S. Investment /	nber w27115 Debt and Taxes in Eight U.S. Wars and Two Insurrections /	nber w27116 The Fiscal Theory of Price Level with a Bubble /	Next

May 2020.

A financial crisis is an event of sudden information acquisition about the collateral backing short-term debt in credit markets. When investors see a financial crisis coming, however, they react by more intensively acquiring information about firms in stock markets, revealing those that are weaker, which as a consequence end up cut off from credit. This cleansing effect of stock markets' information on credit markets' composition discourage information acquisition about the collateral of the firms remaining in credit markets, slowing down credit growth and potentially preventing a crisis. Production of information in stock markets, then, acts as a macroprudential tool in the economy.