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February 2015

The informational role of stock prices

Alvaro Enrique Pedraza Morales's picture

In both high-income and developing countries, firms’ long-term funding via equity financing plays a smaller role than bond issuances and syndicated loans (Cortina et al., 2015). However, developed and liquid stock markets are expected to play a key role by aggregating information about economic activity and firms’ fundamentals; information that in turn might be useful for firms’ managers, capital providers and regulatory authorities. In this sense, stock prices are expected to improve efficiency by directing capital towards more productive uses. For example, stock prices might facilitate firms’ access to credit by reducing information asymmetries between capital providers and firms, or alternatively, the stock price of a company might be informative to the manager when making a real investment decision.

Experiencing development: fast cars and fast cash

Bilal Zia's picture

In a new World Bank working paper, Bilal Zia and his coauthors study how insights from the biology of the human mind can help to better understand and facilitate learning of key development concepts, especially among illiterate populations in poor countries. To make people experience- rather than learning- the concept of probability, the researchers played a simple dice game in rural South Africa in a RCT involving 840 individuals. In the game each player started with one die and rolled till she got a six, then she was handed two dice and rolled till she got two sixes which on average took her much longer. Depending on how fast players were able to roll two sixes, they could reflect and update their beliefs about winning odds. Afterwards, players were told that winning the lotto would be equivalent to them rolling all sixes on nine dice. Read the complete blog post.

The Anatomy of a Credit Crunch: From Labor to Capital Markets

Roberto N. Fattal Jaef's picture

Financial crisis are typically associated with severe economic contractions and, in particular, lasting deteriorations in labor market conditions. Both the Great Depression and the 2007-9 recession are dramatic examples of such phenomena, which seems to be a more general attribute of credit-driven episodes of economic contraction (Reihnart and Rogoff, 2009). Why is this?

Despite such close connection between financial crises and sustained rises in unemployment, there is very little understanding of the mechanisms through which disruptions in credit markets transmit to labor market outcomes. In this blog post, we summarize one such mechanism, developed in Buera, Fattal-Jaef, and Shin (2014), which attempts to fill this gap developing a quantitative model with financial and labor market frictions.