We develop and estimate a general equilibrium model in which monetary policy can deviate from active inflation stabilization and agents face uncertainty about the nature of these deviations. When observing a deviation, agents conduct Bayesian learning to infer its likely duration. Under...

In asset pricing, estimation risk refers to investor uncertainty about the parameters of the return or cashflow process. We show that with estimation risk the observable properties of prices and returns can differ significantly from the properties perceived by rational investors. In particular,...

Most economic analyses presume that there are limited differences in the prior beliefs of individuals, as assumption most often justified by the argument that sufficient common experiences and observations will eliminate disagreements. We investigate this claim using a simple model of Bayesian...

R&D-intensive firms such as biotechnology and pharmaceutical companies follow very different corporate financial policies from firms in less R&D-intensive industries. To account for these differences, we propose an equilibrium model for such firms in which their capital structure, amount of R&D...

This paper proposes a theory of liquidity dynamics. Illiquidity results from asymmetric information. Observing the historical track record teaches agents how to interpret public information and helps overcome information asymmetry. There can be an illiquidity trap: too much asymmetric...

This paper analyzes a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on the unobservable effort exerted by a credit rating agency (CRA). We analyze optimal compensation schemes for the CRA that differ depending on whether a social...

We study a model where some agents have private information about risky asset returns and trade to obtain capital gains, while others acquire the risky asset and hold it to maturity, forming expectations of returns based on market prices. We show that under such a structure, in addition to fully...

In this paper we survey the theoretical and empirical literature on market liquidity. We organize both literatures around three basic questions: (a) how to measure illiquidity, (b) how illiquidity relates to underlying market imperfections and other asset characteristics, and (c) how illiquidity...

We extend Kyle's (1985) model of insider trading to the case where liquidity provided by noise traders follows a general stochastic process. Even though the level of noise trading volatility is observable, in equilibrium, measured price impact is stochastic. If noise trading volatility is...

Current theoretical and empirical research suggests that small banks have a comparative advantage in processing soft information and delivering relationship lending. The most comprehensive analysis of this view found using U.S. data that smaller SMEs borrow from smaller banks and smaller banks...