Abstract
Cun (2021) posits information cycles as a new perspective to understand business cycle patterns, and in particular, patterns regarding capital reallocation. In the model of this paper, the degree of information asymmetry on capital quality is endogenously determined and varies with business cycles. The information cycles significantly exacerbate the macroeconomic effects compared to a model where the degree of information asymmetry is constant. This important result provides an alternative explanation for what drives the highly volatile and procyclical nature of capital reallocation. I discuss some qualitative and quantitative implications of this model, as well as potential extensions.
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