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Lending cycles

  • Asea, Patrick K.
  • Blomberg, Brock

We investigate the lending behavior of banks by exploiting a rich panel dataset on the contract terms of approximately two million commercial and industrial loans granted by 580 banks between 1977-1993. Using a Markov switching panel model we demonstrate that banks change their lending standards from tightness to laxity systematically over the cycle. We then use an efficient minimum chi-square estimator to examine the relationship between the cyclical component of aggregate unemployment and bank lending standards when both variables are jointly endogenously determined in a system of simultaneous equations with mixed, continuous/discrete dependent variables. The patterns we uncover suggest that lax lending standards that tend to occur during expansions exert considerable influence on the dynamics of aggregate fluctuations.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 83 (1998)
Issue (Month): 1-2 ()
Pages: 89-128

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Handle: RePEc:eee:econom:v:83:y:1998:i:1-2:p:89-128
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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