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Banking Productivity and Economic Fluctuations: Colombia 1998-2000

  • Arias Andrés

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    This paper builds a general equilibrium, financial accelerator model hat incorporates an explicit technology for the intermediary sector. Acredit multiplier emerges because of a borrowing constraint that is a function of asset prices, internal funds and lending rates. With this financial friction I show that small changes in the productivity and intermediation costs of banks generate large and persistent fluctuations in economic activity. The transmission channel relies on the role that assets and internal funds play as collateral. After a negative shock hits financial intermediation productivity, the resulting credit crunch and economic slowdown induce a fall in asset prices and internal fund accumulation. This further modifies the present and future volume of collateral, thereby amplifying and propagating the initial shock. The paper argues that changes in banking regulation in Colombia in the late 1990´s increased intermediation costs, reduced banking productivity and induced a credit multiplier story that fits the theoretical model presented here. This new regulation enhanced the credit crunch and economic slowdown that was already underway. Colombian data on loan/deposit interest rate spreads, credit volume, asset prices and economic activity support this argument.

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    File URL: http://economia.uniandes.edu.co/revistadys/49/904dBanking.pdf
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    Article provided by UNIVERSIDAD DE LOS ANDES-CEDE in its journal REVISTA DESARROLLO Y SOCIEDAD.

    Volume (Year): (2002)
    Issue (Month): ()
    Pages:

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    Handle: RePEc:col:000090:004099
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    1. Allen N. Berger & David B. Humphrey, 1990. "Measurement and efficiency issues in commercial banking," Finance and Economics Discussion Series 151, Board of Governors of the Federal Reserve System (U.S.).
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    4. Andrés Felipe Arias, 2000. "The Colombian Banking Crisis: Macroeconomic Consequences And What To Expect," BORRADORES DE ECONOMIA 003573, BANCO DE LA REPÚBLICA.
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    11. Bhattacharya, Joydeep & Huybens, Elisabeth & Guzman, Mark G. & Smith, Bruce D., 1997. "Monetary, Fiscal, and Bank Regulatory Policy in a Simple Monetary Growth Model," Staff General Research Papers 5136, Iowa State University, Department of Economics.
    12. Bruce D. Smith & John H. Boyd, 1998. "The evolution of debt and equity markets in economic development," Economic Theory, Springer, vol. 12(3), pages 519-560.
    13. Bhattacharyya, Arunava & Lovell, C. A. K. & Sahay, Pankaj, 1997. "The impact of liberalization on the productive efficiency of Indian commercial banks," European Journal of Operational Research, Elsevier, vol. 98(2), pages 332-345, April.
    14. Andrés Felipe Arias, . "The Colombian Banking and Crisis: Macroeconomic Consequences and What to Expect," Borradores de Economia 157, Banco de la Republica de Colombia.
    15. Berg, Sigbjorn Atle & Forsund, Finn R. & Hjalmarsson, Lennart & Suominen, Matti, 1993. "Banking efficiency in the Nordic countries," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 371-388, April.
    16. Alam, Ila M Semenick, 2001. "A Nonparametric Approach for Assessing Productivity Dynamics of Large U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 121-39, February.
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