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The Credit Market and the Determinants of Credit Crunches: An Agent Based Modeling Approach

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  • Holmberg, Ulf

    ()
    (Department of Economics, Umeå University)

Abstract

This paper presents a credit market model and finds, using an agent based modeling approach, that credit crunches have a tendency to occur; even when credit markets are almost entirely transparent in the absence of external shocks. We find evidence supporting the asset deterioration hypothesis and results that emphasize the importance of accurate firm quality estimates. In addition, we find that an increase in the debt’s time to maturity, homogenous expected default rates and a conservative lending approach, reduces the probability of a credit crunch. Thus, our results suggest some up till now partially overlooked components contributing to the financial stability of an economy.

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Bibliographic Info

Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 836.

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Length: 28 pages
Date of creation: 17 Feb 2012
Date of revision:
Handle: RePEc:hhs:umnees:0836

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Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
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Web page: http://www.econ.umu.se/
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Related research

Keywords: financial stability; banking; lending; screening; truncation;

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  1. Allen, Franklin, 1990. "The market for information and the origin of financial intermediation," Journal of Financial Intermediation, Elsevier, vol. 1(1), pages 3-30, March.
  2. Leigh Tesfatsion, 2006. "Agent-Based Computational Economics: A Constructive Approach to Economic Theory," Computing in Economics and Finance 2006 527, Society for Computational Economics.
  3. Andreasen, Martin & Ferman, Marcelo & Zabczyk, Pawel, 2012. "The business cycle implications of banks’ maturity transformation," Bank of England working papers 446, Bank of England.
  4. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
  5. Chiesa, Gabriella, 1998. "Information production, banking industry structure and credit allocation," Research in Economics, Elsevier, vol. 52(4), pages 409-430, December.
  6. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  7. Gregory F. Udell, 2009. "How will a credit crunch affect small business finance?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar6.
  8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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