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The Macroprudential Role of Stock Markets

Author

Listed:
  • Kyriakos T. Chousakos
  • Gary B. Gorton
  • Guillermo Ordoñez

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.

Suggested Citation

  • Kyriakos T. Chousakos & Gary B. Gorton & Guillermo Ordoñez, 2020. "The Macroprudential Role of Stock Markets," NBER Working Papers 27113, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27113
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    References listed on IDEAS

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    3. Cortes, Gustavo S. & Taylor, Bryan & Weidenmier, Marc D., 2022. "Financial factors and the propagation of the Great Depression," Journal of Financial Economics, Elsevier, vol. 145(2), pages 577-594.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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