Subjective Expectations and Financial Intermediation

Subjective Expectations and Financial Intermediation (Francesco D’Acunto, Janet Gao, Lu Liu, Kai Lu, Zhengwei Wang, Jun Yang)

Abstract:

We document substantial variation in the credit supply choices made by managers within financial intermediaries (loan officers). Using a customized survey and an information-provision experiment, we establish that loan officers’ subjective expectations about inflation, GDP growth, and policy rates have a sizable causal effect on credit supply choices and help explain their heterogeneity. Subjective expectations also drive heterogeneous sensitivity to changes in borrowers’ fundamentals: officers with rosier macroeconomic expectations penalize less borrowers with worsening fundamentals than do officers with more pessimistic expectations. Our findings have implications for theories of credit market fluctuations and of the frictions to the transmission of monetary policy.

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