A0346
Title: Learning about banks' net worth and the slow recovery after the crisis
Authors: Josef Hollmayr - Deutsche Bundesbank (Germany) [presenting]
Michael Kuehl - Deutsche Bundesbank (Germany)
Abstract: Imperfect information about the net worth of banks and its consequences for the real economy is discussed. In a first part, we show empirically that expectations about the net earnings of banks (as growth of net worth) are truly biased during and in the aftermath of the financial crisis. This forecast error of professional investors cannot be attributed to information rigidities but to noisy information. This leads investors to follow a learning behavior about past forecast errors in forming their expectations about future earnings during the crisis. In a second part, by drawing on a New Keynesian general equilibrium model with a banking sector we demonstrate that incorporating this type of information updating and expectations formation about the net worth of banks can produce a slow recovery compared to a full information rational expectation case. We therefore argue that the slow recovery after the financial crisis in the US can be partly traced back to imperfect information about the net worth of banks.
