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Credit Crunches from Occasionally Binding Bank Borrowing Constraints

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Listed:
  • Tom D. Holden
  • Paul Levine
  • Jonathan M. Swarbrick

Abstract

We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the countercyclical, positively skewed equity issuance that are characteristic of the credit crunches observed in the data.

Suggested Citation

  • Tom D. Holden & Paul Levine & Jonathan M. Swarbrick, 2017. "Credit Crunches from Occasionally Binding Bank Borrowing Constraints," Staff Working Papers 17-57, Bank of Canada.
  • Handle: RePEc:bca:bocawp:17-57
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Business fluctuations and cycles; Credit and credit aggregates; Economic models; Financial markets;

    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
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G2 - Financial Economics - - Financial Institutions and Services

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