NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Informational Imperfections in the Capital Market and Macro-Economic Fluctuations

Bruce C. Greenwald, Joseph E. Stiglitz, Andrew Weiss

NBER Working Paper No. 1335 (Also Reprint No. r0560)
Issued in April 1984
NBER Program(s):   PE

This paper describes the role that informational imperfections in capital markets are likely to play in business cycles. It then developes a simple illustrative model of the impact of adverse selection in the equity market and the way in which this may lead to large fluctuations in the effective cost of capital in response to relatively small demand shocks.

The model also derives an expression for the cost of equity capital in the presence of adverse selection and provides informational explanations for several widely observed macro-economic phenomena.

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Document Object Identifier (DOI): 10.3386/w1335

Published: Greenwald, Bruce, Joseph E. Stiglitz and Anfrew Weiss. "Informational Imperfections in the Capital Market and Macro-Economic Fluctuations." American Economic Review, Vol. 74, No. 2, (May 1984), pp. 194-199.

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