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Banking Productivity and Economic Fluctuations: Colombia 1998-2000

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  • Arias Andrés

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    Abstract

    This paper builds a general equilibrium, financial accelerator model hat incorporates an explicit technology for the intermediary sector. Acredit multiplier emerges because of a borrowing constraint that is a function of asset prices, internal funds and lending rates. With this financial friction I show that small changes in the productivity and intermediation costs of banks generate large and persistent fluctuations in economic activity. The transmission channel relies on the role that assets and internal funds play as collateral. After a negative shock hits financial intermediation productivity, the resulting credit crunch and economic slowdown induce a fall in asset prices and internal fund accumulation. This further modifies the present and future volume of collateral, thereby amplifying and propagating the initial shock. The paper argues that changes in banking regulation in Colombia in the late 1990´s increased intermediation costs, reduced banking productivity and induced a credit multiplier story that fits the theoretical model presented here. This new regulation enhanced the credit crunch and economic slowdown that was already underway. Colombian data on loan/deposit interest rate spreads, credit volume, asset prices and economic activity support this argument.

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    Article provided by UNIVERSIDAD DE LOS ANDES-CEDE in its journal REVISTA DESARROLLO Y SOCIEDAD.

    Volume (Year): (2002)
    Issue (Month): ()
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    Handle: RePEc:col:000090:004099

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    Related research

    Keywords: financial accelerator; banking productivity; intermediation costs; borrowing limit; credit crunch; amplification; propagation;

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    1. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, National Bureau of Economic Research, Inc, in: Output Measurement in the Service Sectors, pages 245-300 National Bureau of Economic Research, Inc.
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    3. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-03, C.V. Starr Center for Applied Economics, New York University.
    4. Philippe AGHION & Philippe BACCHETTA & Abhijit BANERJEE, 1999. "A Simple Model of Monetary Policy and Currency Crises," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 9914, Université de Lausanne, Faculté des HEC, DEEP.
    5. Berg, Sigbjorn Atle & Forsund, Finn R. & Hjalmarsson, Lennart & Suominen, Matti, 1993. "Banking efficiency in the Nordic countries," Journal of Banking & Finance, Elsevier, Elsevier, vol. 17(2-3), pages 371-388, April.
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    10. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 87-114, February.
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    12. Andrés Felipe Arias, . "The Colombian Banking and Crisis: Macroeconomic Consequences and What to Expect," Borradores de Economia, Banco de la Republica de Colombia 157, Banco de la Republica de Colombia.
    13. Bruce D. Smith & John H. Boyd, 1998. "The evolution of debt and equity markets in economic development," Economic Theory, Springer, Springer, vol. 12(3), pages 519-560.
    14. Bhattacharyya, Arunava & Lovell, C. A. K. & Sahay, Pankaj, 1997. "The impact of liberalization on the productive efficiency of Indian commercial banks," European Journal of Operational Research, Elsevier, Elsevier, vol. 98(2), pages 332-345, April.
    15. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, American Economic Association, vol. 87(5), pages 893-910, December.
    16. Andrés Felipe Arias, 2000. "The Colombian Banking Crisis: Macroeconomic Consequences And What To Expect," BORRADORES DE ECONOMIA, BANCO DE LA REPÚBLICA 003573, BANCO DE LA REPÚBLICA.
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