Abstract
We provide a systematic empirical assessment of the Minsky hypothesis that business fluctuations stem from irrational swings in expectations. Using predictable firm-level forecast errors, we build an aggregate index of irrational expectations and use it to provide three sets of results. First, we show that our index predicts aggregate credit cycles. Next, we show that these predictable credit cycles drive cycles in firm-level debt issuance and investment and similar cycles between financially constrained and unconstrained firms, as Minsky predicts. Finally, we show more pronounced cycles in firm-level financing and investment for firms with ex ante more optimistic expectations.
Original language | English (US) |
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Pages (from-to) | 3335-3385 |
Number of pages | 51 |
Journal | Review of Financial Studies |
Volume | 37 |
Issue number | 11 |
DOIs | |
State | Published - Nov 1 2024 |
Keywords
- E32
- E44
- G31
- G32
- G40
- JEL
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics