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Collateral Shocks, Lending Relationships and Economic Dynamics

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  • Vivek Sharma

Abstract

What are the effects of changing bank lending conditions in a model in which borrowers have endogenously-persistent credit relationships with lenders? This paper answers this question in a simple Two-Agent New Keynesian (TANK) setup. Fluctuations in collateral requirements, termed collateral shocks in this paper, result in a rise in spread, a drop in bank credit and amplification of macroeconomic volatility. These effects are amplified by presence of lending relationships and are greater at higher persistence and volatility of the collateral shocks. The results in this paper underscore that credit relationships matter when collateral shocks hit the economy and a model that assumes away the existence of these lending relationships, risks underestimating their effects.

Suggested Citation

  • Vivek Sharma, 2023. "Collateral Shocks, Lending Relationships and Economic Dynamics," CAMA Working Papers 2023-49, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2023-49
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2023-10/49_2023_sharma.pdf
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    More about this item

    Keywords

    Collateral Shocks; Lending Relationships; Economic Activity;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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