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Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-09

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  • Tobias Adrian

    (Federal Reserve Bank of New York)

  • Paolo Colla

    (Bocconi University)

  • Hyun Song Shin

    (Princeton University)

Abstract

The financial crisis of 2007-09 has sparked keen interest in models of financial frictions and their impact on macro activity. Most models share the feature that borrowers suffer a contraction in the quantity of credit. However, the evidence suggests that although bank lending contracted during the crisis, bond financing actually increased to make up much of the gap. This paper reviews both aggregate and micro-level data and highlights the shift in the composition of credit between loans and bonds. Motivated by the evidence, we formulate a model of direct and intermediated credit that captures the key stylized facts. In our model, the impact on real activity comes from the spike in risk premiums rather than the contraction in the total quantity of credit.

Suggested Citation

  • Tobias Adrian & Paolo Colla & Hyun Song Shin, 2011. "Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-09," Working Papers 1396, Princeton University, Department of Economics, Econometric Research Program..
    • Handle: RePEc:pri:metric:wp036_2012_adrian_colla_shin_which%20financial%20frictions.pdf
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    Cited by:

    1. Tobias Adrian & Nina Boyarchenko, 2013. "Intermediary balance sheets," Staff Reports 651, Federal Reserve Bank of New York.
    2. Goldstein, Itay & Razin, Assaf, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends(R) in Finance, now publishers, vol. 10(2), pages 113-180, 30.
    3. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York, revised 01 Feb 2015.
    4. Philippe Bacchetta & Eric van Wincoop, 2016. "The Great Recession: A Self-Fulfilling Global Panic," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 177-198, October.
    5. Fiorella De Fiore & Harald Uhlig, 2015. "Corporate Debt Structure and the Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(8), pages 1571-1598, December.
    6. Se-Jik Kim & Hyun Song Shin, 2013. "Working Capital, Trade and Macro Fluctuations," Working Papers 1465, Princeton University, Department of Economics, Center for Economic Policy Studies..
    7. IIBOSHI Hirokuni & MATSUMAE Tatsuyoshi & NISHIYAMA Shin-Ichi, 2014. "Sources of the Great Recession：A Bayesian Approach of a Data-Rich DSGE model with Time-Varying Volatility Shocks," ESRI Discussion paper series 313, Economic and Social Research Institute (ESRI).
    8. repec:pri:cepsud:235shin is not listed on IDEAS
    9. Bo Becker & Jens Josephson, 2016. "Insolvency Resolution and the Missing High-Yield Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2814-2849.
    10. Rebecca Zarutskie & Tiantian Yang, 2016. "How Did Young Firms Fare during the Great Recession? Evidence from the Kauffman Firm Survey," NBER Chapters, in: Measuring Entrepreneurial Businesses: Current Knowledge and Challenges, pages 253-290, National Bureau of Economic Research, Inc.
    11. Ongena, Steven & Peydró, José-Luis & Horen, Neeltje van, 2015. "Shocks Abroad, Pain at Home? Bank-Firm Level Evidence on the International Transmission of Financial Shocks," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 63(4), pages 698-750.
    12. Marino, Immacolata & Bruno, Brunella & D'Onofrio, Alexandra, 2017. "Financial frictions and corporate investment in bad times. Who cut back most?," CEPR Discussion Papers 12003, C.E.P.R. Discussion Papers.
    13. Emil Siriwardane, 2014. "Concentrated Capital Losses and the Pricing of Corporate Credit Risk," Working Papers 14-10, Office of Financial Research, US Department of the Treasury, revised 12 Feb 2015.
    14. Josef Schroth, 2012. "Financial Crisis Resolution," Staff Working Papers 12-42, Bank of Canada.
    15. André K. Anundsen & Karsten Gerdrup & Frank Hansen & Kasper Kragh‐Sørensen, 2016. "Bubbles and Crises: The Role of House Prices and Credit," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1291-1311, November.
    16. Igan, Deniz & Kabundi, Alain & De Simone, Francisco Nadal & Tamirisa, Natalia, 2017. "Monetary policy and balance sheets," Journal of Policy Modeling, Elsevier, vol. 39(1), pages 169-184.
    17. Linda S. Goldberg, 2013. "Banking Globalization, Transmission, and Monetary Policy Autonomy," NBER Working Papers 19497, National Bureau of Economic Research, Inc.
    18. Se-Jik Kim & Hyun Song Shin, 2013. "Working Capital, Trade and Macro Fluctuations," Working Papers 1465, Princeton University, Department of Economics, Center for Economic Policy Studies..
    19. Tobias Adrian & Nina Boyarchenko, 2012. "Intermediary leverage cycles and financial stability," Staff Reports 567, Federal Reserve Bank of New York.
    20. Fulvio Corsi & Stefano Marmi & Fabrizio Lillo, 2016. "When Micro Prudence Increases Macro Risk: The Destabilizing Effects of Financial Innovation, Leverage, and Diversification," Operations Research, INFORMS, vol. 64(5), pages 1073-1088, October.
    21. Josef Schroth, 2016. "Optimal Intermediary Rents," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 98-118, January.

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    More about this item

    Keywords

    financial intermediation; credit supply;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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