Asymmetric Information in Macroeconomics

Abstract

This thesis studies how asymmetric information regarding the quality of assets held by firms can impose constraints on productive activities. Chapter 1 begins the groundwork by studying a stochastic version of the Kiyotaki and Moore (2008) model. In this environment, exogenous shocks affect the ease with which assets (equity) can be used as collateral to obtain funding for investment projects. This chapter argues that these liquidity shocks are not important sources of business cycle fluctuations absent other frictions affecting the labor market.

Chapter 2 describes how asymmetric information about the quality of capital can determine the liquidity of assets. In this chapter, liquidity is used to relax financial constraints that constrain investment and employment decisions. Employment constraints, as explained in Chapter 1, are crucial to generate strong output declines. The theory clarifies how liquidity is determined by the wedges induced by financial frictions and, in turn, how these wedges depend on liquidity. Unlike real business cycle theory, the theory suggests that aggregate fluctuations can also be attributed to mean preserving spreads in the quality of capital. Quantitatively, the model generates sizeable recessions similar in magnitude to the financial crisis of 2008-2009.

Chapter 3 links liquidity shocks and asymmetric information to the net worth of banks. The model explains how low bank equity can have adverse consequences on the liquidity of firms in the productive sector. In turn, asymmetric information can explain why banks may fail to be recapitalized quickly after large losses. In the model, banks provide intermediation services when assets are subject to informational asymmetries. Intermediation is risky because banks take positions over assets under disadvantageous information. Movements in the quality distribution of capital can cause large losses that reduce bank net worth and, therefore, the capacity to bear further losses. Losing this capacity leads them to reduce intermediation volumes that, in turn, exacerbate adverse selection. Adverse selection, as a consequence, lowers bank profits, which explains the failure to attract new equity.

The financial crises described in Chapter 3 are characterized by a depression in economic growth that is overcome only after banks slowly strengthen by retaining earnings. The model is used to analyze policy interventions.