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Lending Efficiency Shocks

Listed author(s):
  • Tao Zha

    (Federal Reserve Bank of Atlanta)

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We use lending-standard data from the surveys of senior loans officers and banks' lending capacity to help identify the mechanism that translates shocks to the efficiency of information acquisition by financial institutions into business cycle fluctuations. Under costly verification, the bank chooses to monitor the returns of those entrepreneurs with insufficient net worth. This choice distorts the allocation of existing capital among entrepreneurs of different sizes. A crucial ingredient of the model is that the outcome of monitoring is endogenous, depending on both the efficiency of monitoring and the resources devoted to verifying the returns of a project. As a consequence, a negative shock to monitoring efficiency forces the bank to increase monitoring intensity and reduce loans for small entrepreneurs. This results in an increase in productivity dispersion and a recession. To validate our model, we use the COMPUSTAT dataset and find a significant countercyclical pattern for the relative capital productivity of small to large firms, and a procyclical capital allocation between small firms and large firms. Along with empirical support from the data on business lending capacity, these empirical findings reinforce the identification of lending efficiency shocks separate from other aggregate shocks as a source of financial frictions.

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File URL: https://economicdynamics.org/meetpapers/2015/paper_835.pdf
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Paper provided by Society for Economic Dynamics in its series 2015 Meeting Papers with number 835.

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Date of creation: 2015
Handle: RePEc:red:sed015:835
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
  2. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
  3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  4. Chen, Kaiji & Song, Zheng, 2013. "Financial frictions on capital allocation: A transmission mechanism of TFP fluctuations," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 683-703.
  5. Bachmann, Ruediger & Bayer, Christian, 2009. "Firm-specific productivity risk over the business cycle: facts and aggregate implications," Discussion Paper Series 1: Economic Studies 2009,15, Deutsche Bundesbank, Research Centre.
  6. Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 1, pages 3-64 Elsevier.
  7. Rui Castro & Gian Luca Clementi & Yoonsoo Lee, 2008. "Cross-sectoral variation in firm-level idiosyncratic risk," Working Paper 0812, Federal Reserve Bank of Cleveland.
  8. Roberto Motto & Massimo Rostagno & Lawrence J. Christiano, 2010. "Financial Factors in Economic Fluctuations," 2010 Meeting Papers 141, Society for Economic Dynamics.
  9. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
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