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Credit Traps

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  • Efraim Benmelech
  • Nittai K. Bergman

Abstract

This paper studies the limitations of monetary policy transmission within a credit channel frame- work. We show that, under certain circumstances, the credit channel transmission mechanism fails in that liquidity injections by the central bank into the banking sector are hoarded and not lent out. We use the term ‘credit traps’ to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. Our analysis offers a characterization of the problems created by credit traps as well as potential solutions and policy implications. Among these, the analysis shows how quantitative easing and fiscal policy acting in conjunction with monetary policy may be useful in increasing bank lending. Further, the model shows how small contractions in monetary policy or in loan supply can lead to collapses in lending, aggregate investment, and collateral prices.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16200.

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Date of creation: Jul 2010
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Publication status: published as Efraim Benmelech & Nittai K. Bergman, 2012. "Credit Traps," American Economic Review, American Economic Association, vol. 102(6), pages 3004-32, October.
Handle: RePEc:nbr:nberwo:16200

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  1. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," NBER Working Papers 3906, National Bureau of Economic Research, Inc.
  2. Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
  3. Enrique G. Mendoza, 2010. "Sudden Stops, Financial Crises, and Leverage," American Economic Review, American Economic Association, vol. 100(5), pages 1941-66, December.
  4. Adriano A. Rampini & S. Viswanathan, 2010. "Collateral, Risk Management, and the Distribution of Debt Capacity," Journal of Finance, American Finance Association, vol. 65(6), pages 2293-2322, December.
  5. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc.
  6. Viral V. Acharya & Hyun Song Shin & Tanju Yorulmazer, 2009. "Crisis Resolution and Bank Liquidity," NBER Working Papers 15567, National Bureau of Economic Research, Inc.
  7. Bolton, Patrick & Freixas, Xavier, 2001. "Corporate Finance and the Monetary Transmission Mechanism," CEPR Discussion Papers 2892, C.E.P.R. Discussion Papers.
  8. Jeremy C. Stein, 1995. "An Adverse Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy," NBER Working Papers 5217, National Bureau of Economic Research, Inc.
  9. Efraim Benmelech & Mark J. Garmaise & Tobias J. Moskowitz, 2005. "Do Liquidation Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 1121-1154, August.
  10. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January.
  11. Efraim Benmelech, 2009. "Asset Salability and Debt Maturity: Evidence from Nineteenth-Century American Railroads," Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1545-1584, April.
  12. Efraim Benmelech & Nittai K. Bergman, 2008. "Collateral Pricing," NBER Working Papers 13874, National Bureau of Economic Research, Inc.
  13. John Geanakoplos & Ana Fostel, 2008. "Leverage Cycles and the Anxious Economy," American Economic Review, American Economic Association, vol. 98(4), pages 1211-44, September.
  14. Viral V. Acharya & S. Viswanathan, 2011. "Leverage, Moral Hazard, and Liquidity," Journal of Finance, American Finance Association, vol. 66(1), pages 99-138, 02.
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Cited by:
  1. Nadauld, Taylor D. & Weisbach, Michael S., 2012. "Did securitization affect the cost of corporate debt?," Journal of Financial Economics, Elsevier, vol. 105(2), pages 332-352.
  2. Massa, Massimo & Zhang, Lei, 2013. "Monetary policy and regional availability of debt financing," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 439-458.
  3. Shleifer, Andrei & Vishny, Robert W., 2010. "Unstable banking," Journal of Financial Economics, Elsevier, vol. 97(3), pages 306-318, September.

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