I study the effect of forward guidance in a flexible-price economy in which both the private sector and the central bank are subject to imperfect information about the aggregate state of the economy. When forward guidance is provided, the central bank reveals its current imperfect information and commits to a policy rule that makes future policy conditional on perfect information that is only available in the future. The information provided by forward guidance makes individual prices more responsive to firm-specific technology shocks, which increases production efficiency at the cost of higher cross-sectional price variation. The net effect improves social welfare.
We investigate the effects of financial liberalization on the dynamism of the credit market. We measure interfirm credit reallocation in the U.S. states following a methodology akin to Davis and Haltiwanger (1992). We then exploit the staggered liberalization of the credit markets of the U.S. states to identify an exogenous shock to the credit reallocation process. The liberalization intensified credit reallocation in the states, even within narrowly defined groups of continuing firms, while leaving credit growth essentially unaltered. The results suggest that the increased credit market dynamism enhanced the allocation of funds to productive firms and total factor productivity growth.
Consider a bank which chooses an asset portfolio and then, upon the public disclosure of the results of a review of its quality, raises funds by offering a repayment promise. We show that increasing the precision of information about the quality of the bank's assets lowers the cost of funding of a sound bank and encourages it to take risk. Maximum stability is reached in an opaque environment. Maximum surplus is reached in an opaque (transparent) environment when the social costs of bank failure are large (small). We examine how these conclusions change under alternative information and contractual conditions.
We study the determinants of inventory accumulation in a structural vector autoregression (VAR) framework with news shocks. Specifically, we investigate how news shocks affect two key determinants of inventory movements, namely, rates of return and marginal costs. We establish that inventories react strongly and positively to news about future increases in total factor productivity. We provide evidence that changes in external and internal rates of return are central to the transmission for such news shocks. We do not find evidence for a dominant role of marginal costs.
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