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Lending standards, productivity, and credit crunches

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  • Swarbrick, Jonathan

Abstract

We propose a macroeconomic model in which adverse selection in investment amplifies macroeconomic fluctuations, in line with the prominent role played by the credit crunch during the financial crisis. Endogenous lending standards emerge due to an informational asymmetry between borrowers and lenders about the riskiness of borrowers. By using loan approval probability as a screening device, banks ration credit following increases in lending risk, generating large endogenous movements in TFP, explaining why productivity often falls during crises. Furthermore, the mechanism implies that financial instability is heightened when interest rates are low.

Suggested Citation

  • Swarbrick, Jonathan, 2023. "Lending standards, productivity, and credit crunches," Macroeconomic Dynamics, Cambridge University Press, vol. 27(2), pages 456-481, March.
    • Handle: RePEc:cup:macdyn:v:27:y:2023:i:2:p:456-481_8
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    Cited by:

    1. is not listed on IDEAS
    2. Filardo, Andrew J. & Siklos, Pierre L., 2020. "The cross-border credit channel and lending standards surveys," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 67(C).
    3. Hibiki Ichiue & Jean-Guillaume Sahuc & Yasin Mimir & Jolan Mohimont & Kalin Nikolov & Olivier de Bandt & Sigrid Roehrs & Valério Scalone & Michael Straughan & Bora Durdu, 2022. "Assessing the Impact of Basel III: Evidence from Structural Macroeconomic Models," Working Papers hal-04159816, HAL.
    4. Bank for International Settlements, 2021. "Assessing the impact of Basel III: Evidence from macroeconomic models: literature review and simulations," BCBS Working Papers 38, Bank for International Settlements.
    5. Jonathan Swarbrick, 2021. "Occasionally Binding Constraints in Large Models: A Review of Solution Methods," Discussion Papers 2021-5, Bank of Canada.
    6. Ewa Wróbel, 2022. "What drives bank lending policy? The evidence from bank lending survey for Poland," NBP Working Papers 352, Narodowy Bank Polski.

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • 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
    • G01 - Financial Economics - - General - - - Financial Crises

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