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Credit Crunch in a Model of Financial Intermediation and Occupational Choice

In this paper, we introduce a dynamic general equilibrium model with numerous and heterogeneous investment projects and endogenous occupational choice to study a credit crunch. The investment decision is determined through the occupational choice of households which is driven by the endogenous accumulation of assets as they face various employment and return risks over a long lifetime. Consistent with empirical evidence, the origin of a credit crunch may be found in the conservative lending policies by banks during periods of financial duress and reduced profitability, but not informational problems as in the extant literature. Monetary policy is shown to be largely ineffective in alleviating the credit crunch, while flexible loan regulation can erase it. Dans ce papier, nous introduisons un modèle d'équilibre général dynamique avec de nombreux projets d'investissement hétérogènes et des choix endogènes d'occupation pour étudier une contraction excessive du crédit. La décision d'investissement est déterminée par l'intermédiaire du choix occupationnel du ménage, lui-même dépendant de l'accumulation endogène d'actifs en raison de divers risques d'emploi et de rendement sur une longue durée de vie. Comme cela est indiqué par l'évidence empirique, l'origine d'une contraction excessive du crédit peut être trouvée dans les politiques de crédit conservatrices des banques lors de périodes contraintes financières et de profitabilité réduite, mais sans les problèmes d'information nécessaires dans le reste de la littérature. La politique monétaire s'avère être en grande partie inefficace à combattre ce resserrement du crédit, alors qu'une réglementation flexible des crédits y parvient.

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File URL: http://www.unites.uqam.ca/eco/CREFE/cahiers/cah97.pdf
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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 97.

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Length: 27 pages
Date of creation: Dec 1999
Date of revision:
Handle: RePEc:cre:crefwp:97
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  1. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
  2. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  3. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  4. Joe Peek & Eric S. Rosengren, 1991. "The capital crunch: neither a borrower nor a lender be," Working Papers 91-4, Federal Reserve Bank of Boston.
  5. Edward J. Green & Soo-Nam Oh, 1991. "Can a "credit crunch" be efficient?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-17.
  6. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  7. John Wagster, 1999. "The Basle Accord of 1988 and the International Credit Crunch of 1989–1992," Journal of Financial Services Research, Springer;Western Finance Association, vol. 15(2), pages 123-143, March.
  8. Ceyla Pazarbasioglu, 1996. "A Credit Crunch? a Case Study of Finland in the Aftermath of the Banking Crisis," IMF Working Papers 96/135, International Monetary Fund.
  9. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  10. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  11. Zhaohui Chen & Jorge A. Chan-Lau, 1998. "Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis," IMF Working Papers 98/127, International Monetary Fund.
  12. Fisher, Jonas D M, 1999. "Credit Market Imperfections and the Heterogeneous Response of Firms to Monetary Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 187-211, May.
  13. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 309-340.
  14. Jorge A. Chan-Lau & Zhaohui Chen, 1998. "Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis," International Finance 9804001, EconWPA, revised 24 Apr 1998.
  15. Fuerst, Timothy S, 1995. "Monetary and Financial Interactions in the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1321-38, November.
  16. Steven A. Sharpe, 1995. "Bank capitalization, regulation, and the credit crunch: a critical review of the research findings," Finance and Economics Discussion Series 95-20, Board of Governors of the Federal Reserve System (U.S.).
  17. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 243-270, 01.
  18. Bernanke, Ben S, 1981. "Bankruptcy, Liquidity, and Recession," American Economic Review, American Economic Association, vol. 71(2), pages 155-59, May.
  19. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  20. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  21. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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