scholarly journals Lending standards, productivity, and credit crunches

2021 ◽  
pp. 1-26
Author(s):  
Jonathan Swarbrick
Keyword(s):  
Interest Rates ◽  
Adverse Selection ◽  
Macroeconomic Fluctuations ◽  
Credit Crunch ◽  
Financial Instability ◽  
Macroeconomic Model ◽  
Informational Asymmetry ◽  
Lending Standards ◽  
Loan Approval ◽  
Screening Device

Abstract We propose a macroeconomic model in which adverse selection in investment amplifies macroeconomic fluctuations, in line with the prominent role played by the credit crunch during the financial crisis. Endogenous lending standards emerge due to an informational asymmetry between borrowers and lenders about the riskiness of borrowers. By using loan approval probability as a screening device, banks ration credit following increases in lending risk, generating large endogenous movements in TFP, explaining why productivity often falls during crises. Furthermore, the mechanism implies that financial instability is heightened when interest rates are low.

scholarly journals Do Loan Guarantees Alleviate Credit Rationing and Improve Economic Welfare?

2020 ◽  
Vol 12 (9) ◽  
pp. 3922
Author(s):  
Yu-Lin Wang ◽  
Chien-Hui Lee ◽  
Po-Sheng Ko
Keyword(s):  
High Risk ◽  
Interest Rates ◽  
Adverse Selection ◽  
Social Cost ◽  
Credit Rationing ◽  
Economic Welfare ◽  
Informational Asymmetry ◽  
Collateral Constraint ◽  
Loan Guarantees ◽  
Credit Contracts

By designing credit contracts with inversely related interest rates and collateral, banks can overcome the problems of adverse selection and moral hazard when there is an informational asymmetry in competitive credit markets. One salient result points out that, if borrowers’ insufficient endowments of wealth cause a binding collateral constraint, a credit rationing equilibrium arises because of collateral’s inability to achieve perfect sorting. The purpose of this paper is to examine the consequences of government loan guarantees on equilibrium credit contracts and economic welfare. More specifically, the effects of loan guarantees on interest rates, collateral, and credit rationing were studied. Our results suggest that government loan guarantees should target high-risk entrepreneurs. Loan guarantees targeting high-risk entrepreneurs reduce a pledge of collateral in credit contracts, drop social cost, and increase economic welfare. Under the circumstances that borrowers’ insufficient wealth causes a binding collateral constraint, loan guarantees targeting high-risk entrepreneurs alleviate the problem of credit rationing and improve economic welfare.

On the Retail Sector

2009 ◽  
Vol 21 (1) ◽  
pp. 69-78
Author(s):  
Amelia Correa
Keyword(s):  
Interest Rates ◽  
Price Level ◽  
Industrial Sector ◽  
Retail Trade ◽  
Retail Sector ◽  
Macroeconomic Model ◽  
Trade Sector

We append a retail trade sector to the industrial sector of an economy. The macroeconomic model is a variant of the circuit approach to monetary macroeconomics. The conclusion is that an increase in the size of the ‘unproductive’ sector, employment in the ‘productive’ sector remaining constant, leads to a rise in the price level and interest rates.

Collateral Shocks

2022 ◽  
Vol 14 (1) ◽  
pp. 83-103
Author(s):  
Yvan Becard ◽  
David Gauthier
Keyword(s):  
Business Cycle ◽  
Financial Sector ◽  
Macroeconomic Model ◽  
Market Sentiment ◽  
Lending Standards ◽  
Joint Dynamics ◽  
The Business Cycle

We estimate a macroeconomic model on US data where banks lend to households and businesses and simultaneously adjust lending requirements on the two types of loans. We find that the collateral shock, a change in the ability of the financial sector to redeploy collateral, is the most important force driving the business cycle. Hit by this unique disturbance, our model quantitatively replicates the joint dynamics of output, consumption, investment, employment, and both household and business credit quantities and spreads. The estimated collateral shock generates accurate movements in lending standards and tracks measures of market sentiment. (JEL E21, E23, E24, E32, E44, G21)

Factors affecting Chinese farmers’ microcredit participation

2019 ◽  
Vol 79 (1) ◽  
pp. 48-59 ◽  
Author(s):  
Ming Qin ◽  
Cheryl Joy Wachenheim ◽  
Zhigang Wang ◽  
Shi Zheng
Keyword(s):  
Interest Rates ◽  
Group Membership ◽  
Group Identification ◽  
Northern China ◽  
Family Characteristics ◽  
Content Type ◽  
Heckman Model ◽  
Factors Affecting ◽  
Financial Exclusion ◽  
Loan Approval

Purpose The purpose of this paper is to investigate factors affecting use of microcredit among farmers in Northern China. Design/methodology/approach A two-stage Heckman model is used to estimate the effect of farmer and family characteristics and loan and lending environment on likelihood of farmer participation in microcredit and the value of loans taken. Data from 342 first-hand observations in Northern China were used. Findings Social capital, production cost, non-labor family members, income, guarantee group membership, village head loan guarantee, and messenger use were found to increase use of microcredit. The same factors were found to affect the value of loans among participating farmers except a guarantor requirement for the loan replaces membership in a guarantee group. Practical implications Results support that there is demand for microcredit among farmers and that they are willing to take steps to obtain it including seeking membership in a household guarantee group. Identification of faced constraints facilitates understanding of supply-side efforts with potential to decrease financial exclusion with a focus on external-to-market intervention. Originality/value Pivotal findings are the importance of guarantee group membership for loan approval and that this requirement hinders farmers’ ability to obtain credit. Three alternatives are suggested to overcome this constraint including excluding low-risk borrowers from a group guarantee requirement; charging higher interest rates on high risk loans not supported by a guarantee; and development of insurance options to replace the guarantee.

scholarly journals Integrative literature review of the financial fragility hypothesis proposed by Minsky

2021 ◽  
Author(s):  
Cláudio Caríssimo ◽  
Francisval Melo Carvalho ◽  
carlos eduardo Stefaniak Aveline ◽  
Mozar José de Brito ◽  
rafaela maiara caetano
Keyword(s):  
Public Sector ◽  
Fiscal Policy ◽  
Literature Review ◽  
Interest Rates ◽  
Cash Flow ◽  
Empirical Studies ◽  
Financial Fragility ◽  
Financial Instability ◽  
The Public ◽  
Theoretical Assumptions

<p>This paper conducts an Integrative Literature Review on the Financial Fragility Hypothesis presented by Minsky and on Financial Fragility Applied to the Public Sector. Twenty papers were chosen that addressed the proposed theme in both quantitative and qualitative procedures. The topics discussed ways of measuring financial fragility, effects on fiscal policy and need for regulation, relations between investment, cash flow expectations, the influence of interest rates and indebtedness on firms, and financial instability. The integration reinforced the conceptual aspects and propositions presented by Minsky, broadening in an integrated way the understanding of his theoretical assumptions regarding financial fragility, addressing the causes, observations, and economic and institutional consequences, in addition to signaling for insufficiencies of more empirical studies and the public sector.</p>

scholarly journals Macroeconomic Fluctuations with HANK&SAM: an Analytical Approach

2020 ◽  
Author(s):  
Morten O Ravn ◽  
Vincent Sterk
Keyword(s):  
Steady State ◽  
Interest Rates ◽  
New Keynesian ◽  
Macroeconomic Fluctuations ◽  
Precautionary Savings ◽  
Downward Pressure ◽  
Considerable Impact ◽  
Earnings Risk ◽  
Model Features ◽  
The Impact

Abstract Recently developed HANK models, which combine Heterogeneous Agents and New Keynesian frictions, have had a considerable impact on macroeconomics. However, due to the complexity of such models, the literature has focused on numerically solved models and therefore little is known about their general properties. This paper presents a tractable HANK model that integrates Search and Matching (SAM) frictions in the labor market. The model features an endogenous idiosyncratic earnings risk, which may be procyclical or countercyclical. When this risk is countercyclical, which we argue is the empirically plausible case, there is a downward pressure on real interest rates in recessions due to a precautionary savings motive. We show that in this setting (a) the economy may get stuck in a high-unemployment steady state, (b) the Taylor principle is insufficient to eliminate the local indeterminacy of the intended steady state, and (c) nominal rigidities and inincomplete markets are complementary in terms of amplifying the impact of shocks on the macroeconomy.

Adverse Selection in Insurance Markets: On-Demand Contracts As a Screening Device

2020 ◽  
Author(s):  
Alexander Braun ◽  
Markus Haas ◽  
Christian Hildebrand ◽  
Paul D. Thistle
Keyword(s):  
Adverse Selection ◽  
Insurance Markets ◽  
On Demand ◽  
Screening Device

Adverse Selection and Insurance Contracting: A Rank-Dependent Utility Analysis

2003 ◽  
Vol 3 (1) ◽  
Author(s):  
Matthew Joseph Ryan ◽  
Rhema Vaithianathan
Keyword(s):  
Adverse Selection ◽  
Expected Utility ◽  
Insurance Markets ◽  
Market Segment ◽  
Utility Model ◽  
Information Need ◽  
Utility Analysis ◽  
Informational Asymmetry ◽  
Rank Dependent Utility ◽  
S Model

Stiglitz (1977) established three well-known features of monopoly insurance markets subject to adverse selection: (i) at least one market segment is served, despite the informational asymmetry; (ii) there is always some screening of risk classes; and (iii) efficiency is sacrificed to achieve screening. We modify Stiglitz’s model, replacing his expected utility assumption on consumer behavior with a version of Quiggin’s (1982) rank-dependent utility model that has received strong experimental support. We show that none of the conclusions (i)—(iii) is robust to this revision. In particular, asymmetric information need not lead to any loss in efficiency.

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