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Credit Crunch, Bank Lending and Monetary Policy: A Model of Financial Intermediation with Heterogeneous Projects

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Author Info
Mingwei Yuan () (Bank of Canada)
Christian Zimmermann () (Center for Research on Economic Fluctuations and Employment, UQAM)

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Abstract

This paper studies a credit crunch in a dynamic general equilibrium model economy with numerous and heterogeneous investment projects. Banks provide loans to endogenously arising entrepreneurs and deposit to the rest of the population. The credit crunch is caused by conservative lending policies during periods of financial duress and reduced profitability. We find that monetary policy is largely ineffective in alleviating the credit crunch, while loan regulation can erase it.

Ce papier étudie un rationnement du crédit dans un modèle d'équilibre général dynamique avec des projets d'investissement nombreux et hétérogènes. Les banques offrent des services de crédit á des ménages qui décident de devenir des entrepreneurs et des services de dépôt au reste de la population. Le rationnement est causé par des politiques de prêt conservatrices pendant les périodes de contraintes financières et de profitabilité réduite. Nous trouvons que la politique monétaire ne peut résorber le rationnement, alors que la réglementation du crédit y parvient.

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Publisher Info
Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 89.

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Length: 17 pages
Date of creation: Jul 1999
Date of revision:
Handle: RePEc:cre:crefwp:89

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Related research
Keywords: Credit crunch; Basle accord; heterogeneous agents; bank regulation;

Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
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  1. Jonas D.M. Fisher, 1998. "Credit market imperfections and the heterogeneous response of firms to monetary shocks," Working Paper Series, Macroeconomic Issues 96-23, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  2. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer, vol. 27(1), pages 243-270, 01. [Downloadable!] (restricted)
  3. Steven A. Sharpe, 1995. "Bank capitalization, regulation, and the credit crunch: a critical review of the research findings," Finance and Economics Discussion Series 95-20, Board of Governors of the Federal Reserve System (U.S.).
  4. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May. [Downloadable!] (restricted)
    Other versions:
  5. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
    Other versions:
  6. Zhaohui Chen & Jorge A. Chan-Lau, 1998. "Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation - with Reference to the Asian Financial Crisis," IMF Working Papers 98/127, International Monetary Fund.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  8. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1991-2), pages 205-248. [Downloadable!]
  9. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June. [Downloadable!] (restricted)
    Other versions:
  10. Ceyla Pazarbasioglu, 1996. "A Credit Crunch? A Case Study of Finland in the Aftermath of the Banking Crisis," IMF Working Papers 96/135, International Monetary Fund.
  11. Morgan, Donald P, 1998. "The Credit Effects of Monetary Policy: Evidence Using Loan Commitments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(1), pages 102-18, February.
  12. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May. [Downloadable!] (restricted)
    Other versions:
  13. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-2), pages 1-78. [Downloadable!]
  14. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-38, August. [Downloadable!] (restricted)
    Other versions:
  15. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September. [Downloadable!] (restricted)
    Other versions:
  16. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September. [Downloadable!] (restricted)
    Other versions:
  17. Fuerst, Timothy S, 1995. "Monetary and Financial Interactions in the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1321-38, November. [Downloadable!] (restricted)
    Other versions:
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