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Lending Standards, Productivity and Credit Crunches

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  • Jonathan Swarbrick

Abstract

We propose a macroeconomic model in which adverse selection in investment drives the amplification of macroeconomic fluctuations, in line with prominent roles played by the credit crunch and collapse of the asset-backed security market in 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 financial disturbances, generating large endogenous movements in total factor productivity, explaining why productivity often falls during crises. Furthermore, the mechanism implies that financial instability is heightened when interest rates are low.

Suggested Citation

  • Jonathan Swarbrick, 2019. "Lending Standards, Productivity and Credit Crunches," Staff Working Papers 19-25, Bank of Canada.
    • Handle: RePEc:bca:bocawp:19-25
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    References listed on IDEAS

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    Cited by:

    1. Ewa Wróbel, 2022. "What drives bank lending policy? The evidence from bank lending survey for Poland," NBP Working Papers 352, Narodowy Bank Polski.
    2. Jean-Guillaume Sahuc & Olivier de Bandt & Hibiki Ichiue & Bora Durdu & Yasin Mimir & Jolan Mohimont & Kalin Nikolov & Sigrid Roehrs & Valério Scalone & Michael Straughan, 2022. "Assessing the Impact of Basel III: Evidence from Structural Macroeconomic Models," EconomiX Working Papers 2022-3, University of Paris Nanterre, EconomiX.
    3. Jonathan Swarbrick, 2021. "Occasionally Binding Constraints in Large Models: A Review of Solution Methods," Discussion Papers 2021-5, Bank of Canada.
    4. 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).

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    More about this item

    Keywords

    Business fluctuations and cycles; Credit and credit aggregates; Financial markets; Financial stability; Interest rates; Productivity;
    All these keywords.

    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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