Equilibrium Lending Mechanism and Aggregate Activity
AbstractWhat determines the firm's choice of its mechanism of investment financing? How is the choice of the firm's financing mechanism at the micro level related to the economy's business cycle movements at the aggregate level? This paper develops a model of the credit market where the equilibrium lending mechanism, as well as the economy's aggregate investment and output, are endogenously determined. Among other things, our model predicts that a negative productivity shock can cause an economic downturn that is accompanied not only by a contraction in total outstanding loans, but also by a decline in the ratio of bank loans to non-bank lending, as observed in the 1990-91 U.S. recession.
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12037.
Date of creation: 14 Sep 2004
Date of revision:
Publication status: Published in International Economic Review, August 2010, vol. 51 no. 3, pp. 631-651
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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Other versions of this item:
- Cheng Wang & Ruilin Zhou, 2000. "Equilibrium lending mechanism and aggregate activity," Working Paper Series WP-00-30, Federal Reserve Bank of Chicago.
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