Abstract
We examine the influence of information rigidities about the net worth of banks on the real economy over time. In a first part, we show empirically that expectations about the net earnings of banks (as a proxy for the growth of net worth) are biased, particularly during the financial crisis. Investors display a learning behavior in forming expectations about future bank earnings during the crisis. In a second part, by drawing on a New Keynesian general equilibrium model with a banking sector, we demonstrate that, by quantitatively incorporating this type of information updating and expectations formation about the net worth of banks, noisy information is able to produce a slow recovery in the aftermath of the financial crisis and match the data more closely than in the full information rational expectation (FIRE) case.
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