IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20182207.html
   My bibliography  Save this paper

Lending standards and macroeconomic dynamics

Author

Listed:
  • Gete, Pedro

Abstract

This paper proposes a tractable way to incorporate lending standards ("credit qualification thresholds") into macro models of financial frictions. Banks can reject borrowers whose risk is above an endogenous threshold at which no lending rate sufficiently compensates banks for the borrowers’ default risk. Firms denied credit cut employment and labor reallocates mostly towards safer producers. Lending standards propagate bank capital shortfalls through labor misallocation causing deeper and more persistent real effects. The paper also shows that lending spreads are insufficient indicators of credit supply disruptions. That is, for the same increase in credit spreads, output falls faster when denial rates are increasing. Finally, with endogenous lending standards, first-moment bank capital shocks look like second-moment shocks. JEL Classification: E32, E44, E47, G2

Suggested Citation

  • Gete, Pedro, 2018. "Lending standards and macroeconomic dynamics," Working Paper Series 2207, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182207
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2207.en.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Duygan-Bump, Burcu & Levkov, Alexey & Montoriol-Garriga, Judit, 2015. "Financing constraints and unemployment: Evidence from the Great Recession," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 89-105.
    2. Christoffer Kok & Glenn Schepens, 2013. "Bank reactions after capital shortfalls," Working Paper Research 250, National Bank of Belgium.
    3. Fabrice Collard & Harris Dellas & Behzad Diba & Olivier Loisel, 2017. "Optimal Monetary and Prudential Policies," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 40-87, January.
    4. Lown, Cara & Morgan, Donald P., 2006. "The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1575-1597, September.
    5. Giacomo Rodano & Nicolas Serrano-Velarde & Emanuele Tarantino, 2018. "Lending Standards over the Credit Cycle," The Review of Financial Studies, Society for Financial Studies, vol. 31(8), pages 2943-2982.
    6. Luca Guerrieri & Matteo Iacoviello & Francisco Covas & John C. Driscoll & Mohammad Jahan-Parvar & Michael Kiley & Albert Queralto & Jae Sim, 2019. "Macroeconomic Effects of Banking-Sector Losses across Structural Models," International Journal of Central Banking, International Journal of Central Banking, vol. 15(3), pages 137-204, September.
    7. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    8. Fabio Berton & Sauro Mocetti & Andrea F. Presbitero & Matteo Richiardi, 2018. "Banks, Firms, and Jobs," The Review of Financial Studies, Society for Financial Studies, vol. 31(6), pages 2113-2156.
    9. Gabriel Jiménez & Enrique Moral-Benito & Raquel Vegas, 2018. "Bank lending standards over the cycle: the role of firms’ productivity and credit risk," Working Papers 1811, Banco de España.
    10. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    11. Mark Gertler & Nobuhiro Kiyotaki, 2015. "Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy," American Economic Review, American Economic Association, vol. 105(7), pages 2011-2043, July.
    12. Angeloni, Ignazio & Faia, Ester, 2013. "Capital regulation and monetary policy with fragile banks," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 311-324.
    13. Olivier De Jonghe & Hans Dewachter & Klaas Mulier & Steven Ongena & Glenn Schepens, 2020. "Some Borrowers Are More Equal than Others: Bank Funding Shocks and Credit Reallocation [A theory of systemic risk and design of prudential bank regulation]," Review of Finance, European Finance Association, vol. 24(1), pages 1-43.
    14. Francesco Ferrante, 2018. "A Model of Endogenous Loan Quality and the Collapse of the Shadow Banking System," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(4), pages 152-201, October.
    15. Andrea Ajello, 2016. "Financial Intermediation, Investment Dynamics, and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 106(8), pages 2256-2303, August.
    16. Julia K. Thomas & Aubhik Khan, 2011. "Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity," 2011 Meeting Papers 1333, Society for Economic Dynamics.
    17. Samuel Bentolila & Marcel Jansen & Gabriel Jiménez, 2018. "When Credit Dries Up: Job Losses in the Great Recession," Journal of the European Economic Association, European Economic Association, vol. 16(3), pages 650-695.
    18. Fernández Martín, Andrés & Gulan, Adam, 2012. "Interest Rates and Business Cycles in Emerging Economies: The Role of Financial Frictions," IDB Publications (Working Papers) 4129, Inter-American Development Bank.
    19. Kilian Huber, 2018. "Disentangling the Effects of a Banking Crisis: Evidence from German Firms and Counties," American Economic Review, American Economic Association, vol. 108(3), pages 868-898, March.
    20. Bassett, William F. & Chosak, Mary Beth & Driscoll, John C. & Zakrajšek, Egon, 2014. "Changes in bank lending standards and the macroeconomy," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 23-40.
    21. Kudlyak, Marianna & Sánchez, Juan M., 2017. "Revisiting the behavior of small and large firms during the 2008 financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 48-69.
    22. Luigi Bocola, 2016. "The Pass-Through of Sovereign Risk," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 879-926.
    23. Steven Laufer & Andrew D. Paciorek, 2016. "The Effects of Mortgage Credit Availability : Evidence from Minimum Credit Score Lending Rules," Finance and Economics Discussion Series 2016-098, Board of Governors of the Federal Reserve System (U.S.).
    24. Francisco J. Buera & Benjamin Moll, 2015. "Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 1-42, July.
    25. Mark Gertler, 2012. "Comment on "Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007 to 2009"," NBER Chapters, in: NBER Macroeconomics Annual 2012, Volume 27, pages 215-223, National Bureau of Economic Research, Inc.
    26. Matteo Iacoviello, 2015. "Financial Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 140-164, January.
    27. Andrés Fernández & Adam Gulan, 2015. "Interest Rates, Leverage, and Business Cycles in Emerging Economies: The Role of Financial Frictions," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 153-188, July.
    28. Frédéric Boissay & Fabrice Collard & Frank Smets, 2016. "Booms and Banking Crises," Journal of Political Economy, University of Chicago Press, vol. 124(2), pages 489-538.
    29. Michael Siemer, 2014. "Firm Entry and Employment Dynamics in the Great Recession," Finance and Economics Discussion Series 2014-56, Board of Governors of the Federal Reserve System (U.S.).
    30. Martin Andreasen & Marcelo Ferman & Pawel Zabczyk, 2013. "The Business Cycle Implications of Banks' Maturity Transformation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 581-600, October.
    31. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2014. "Risk Shocks," American Economic Review, American Economic Association, vol. 104(1), pages 27-65, January.
    32. Chris Woolston, 2014. "Rice," Nature, Nature, vol. 514(7524), pages 49-49, October.
    33. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    34. Francisco Buera & Roberto Fattal-Jaef & Yongseok Shin, 2015. "Anatomy of a Credit Crunch: From Capital to Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 101-117, January.
    35. Ravn, Søren Hove, 2016. "Endogenous credit standards and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 89-111.
    36. Gertler, Mark & Kiyotaki, Nobuhiro & Queralto, Albert, 2012. "Financial crises, bank risk exposure and government financial policy," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 17-34.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. Dong, Feng & Xu, Zhiwei, 2020. "Cycles of credit expansion and misallocation: The Good, the Bad and the Ugly," Journal of Economic Theory, Elsevier, vol. 186(C).
    3. Jens Fittje, 2023. "Risk-shifting, concentration risk, and heterogeneous borrowers," International Economics and Economic Policy, Springer, vol. 20(4), pages 509-536, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    2. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi.
    3. Hollmayr, Josef & Kühl, Michael, 2019. "Learning about banks’ net worth and the slow recovery after the financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 109(C).
    4. Zhang, Yahong, 2019. "Household debt, financial intermediation, and monetary policy," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 230-257.
    5. Jacob, Punnoose & Munro, Anella, 2018. "A prudential stable funding requirement and monetary policy in a small open economy," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 89-106.
    6. Reiter, Michael & Zessner-Spitzenberg, Leopold, 2023. "Long-term bank lending and the transfer of aggregate risk," Journal of Economic Dynamics and Control, Elsevier, vol. 151(C).
    7. Christopher Otrok & Andrew Foerster & Alessandro Rebucci & Gianluca Benigno, 2017. "Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime Switching Approach," 2017 Meeting Papers 572, Society for Economic Dynamics.
    8. Caterina Mendicino & Kalin Nikolov & Javier Suarez & Dominik Supera, 2018. "Optimal Dynamic Capital Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(6), pages 1271-1297, September.
    9. Josef Hollmayr & Michael Kuehl, 2016. "Imperfect Information about Financial Frictions and Consequences for the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 179-207, October.
    10. Lewis, Vivien & Roth, Markus, 2018. "Interest rate rules under financial dominance," Journal of Economic Dynamics and Control, Elsevier, vol. 95(C), pages 70-88.
    11. Caterina Mendicino & Kalin Nikolov & Juan Rubio-Ramirez & Javier Suarez, 2020. "Twin Default Crises," Working Papers 2020-01, FEDEA.
    12. Smets, Frank & Villa, Stefania, 2016. "Slow recoveries: Any role for corporate leverage?," Journal of Economic Dynamics and Control, Elsevier, vol. 70(C), pages 54-85.
    13. Fève, Patrick & Moura, Alban & Pierrard, Olivier, 2022. "The fall in shadow banking and the slow U.S. recovery," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    14. Ge, Xinyu & Li, Xiao-Lin & Li, Yong & Liu, Yan, 2022. "The driving forces of China's business cycles: Evidence from an estimated DSGE model with housing and banking," China Economic Review, Elsevier, vol. 72(C).
    15. Yépez, Carlos A., 2018. "Financial intermediation and real estate prices impact on business cycles: A Bayesian analysis," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 138-160.
    16. Ferrante, Francesco, 2019. "Risky lending, bank leverage and unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 100-127.
    17. Stefano Carattini & Garth Heutel & Givi Melkadze, 2023. "Climate Policy, Financial Frictions, and Transition Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 778-794, December.
    18. Fendoğlu, Salih, 2014. "Optimal monetary policy rules, financial amplification, and uncertain business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 271-305.
    19. Anna Belianska & Aurélien Eyquem & Céline Poilly, 2021. "The Transmission Channels of Government Spending Uncertainty," AMSE Working Papers 2115, Aix-Marseille School of Economics, France.
    20. Manuel A. Muñoz, 2021. "Rethinking Capital Regulation: The Case for a Dividend Prudential Target," International Journal of Central Banking, International Journal of Central Banking, vol. 17(3), pages 271-336, September.

    More about this item

    Keywords

    bank capital; bank losses; extensive margin; labor reallocation; lending standards; misallocation;
    All these keywords.

    JEL classification:

    • 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
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G2 - Financial Economics - - Financial Institutions and Services

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20182207. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.