Endogenous credit standards and aggregate fluctuations

Søren Hove Ravn

doi:10.1016/j.jedc.2016.05.011

Endogenous credit standards and aggregate fluctuations

5 Citationer (Scopus)

Abstract

Widespread empirical evidence shows that credit standards fluctuate over the business cycle. We build a macroeconomic model in which countercyclical lending standards emerge as an equilibrium outcome. In the model, banks compete on lending rates as well as collateral requirements. The presence of lending relationships between firms and banks gives rise to endogenous fluctuations in interest rate margins and collateral requirements. We demonstrate that endogenous credit standards amplify business cycles, driving up output volatility by around 25% when compared to a model without lending relationships. Finally, we show that in order to combat the effects of endogenous credit standards on macroeconomic volatility, a countercyclical loan-to-value ratio is an effective macroprudential policy tool.

Originalsprog	Engelsk
Tidsskrift	Journal of Economic Dynamics and Control
Vol/bind	69
Sider (fra-til)	89-111
ISSN	0165-1889
DOI	https://doi.org/10.1016/j.jedc.2016.05.011
Status	Udgivet - 1 aug. 2016

Emneord

Det Samfundsvidenskabelige Fakultet
E22
E32
E44
E60
G28

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10.1016/j.jedc.2016.05.011Licens: Ikke-specificeret

Citationsformater

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title = "Endogenous credit standards and aggregate fluctuations",

abstract = "Widespread empirical evidence shows that credit standards fluctuate over the business cycle. We build a macroeconomic model in which countercyclical lending standards emerge as an equilibrium outcome. In the model, banks compete on lending rates as well as collateral requirements. The presence of lending relationships between firms and banks gives rise to endogenous fluctuations in interest rate margins and collateral requirements. We demonstrate that endogenous credit standards amplify business cycles, driving up output volatility by around 25% when compared to a model without lending relationships. Finally, we show that in order to combat the effects of endogenous credit standards on macroeconomic volatility, a countercyclical loan-to-value ratio is an effective macroprudential policy tool.",

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AU - Ravn, Søren Hove

N1 - JEL classification: E22, E32, E44, E60, G28

PY - 2016/8/1

Y1 - 2016/8/1

N2 - Widespread empirical evidence shows that credit standards fluctuate over the business cycle. We build a macroeconomic model in which countercyclical lending standards emerge as an equilibrium outcome. In the model, banks compete on lending rates as well as collateral requirements. The presence of lending relationships between firms and banks gives rise to endogenous fluctuations in interest rate margins and collateral requirements. We demonstrate that endogenous credit standards amplify business cycles, driving up output volatility by around 25% when compared to a model without lending relationships. Finally, we show that in order to combat the effects of endogenous credit standards on macroeconomic volatility, a countercyclical loan-to-value ratio is an effective macroprudential policy tool.

AB - Widespread empirical evidence shows that credit standards fluctuate over the business cycle. We build a macroeconomic model in which countercyclical lending standards emerge as an equilibrium outcome. In the model, banks compete on lending rates as well as collateral requirements. The presence of lending relationships between firms and banks gives rise to endogenous fluctuations in interest rate margins and collateral requirements. We demonstrate that endogenous credit standards amplify business cycles, driving up output volatility by around 25% when compared to a model without lending relationships. Finally, we show that in order to combat the effects of endogenous credit standards on macroeconomic volatility, a countercyclical loan-to-value ratio is an effective macroprudential policy tool.

KW - Faculty of Social Sciences

KW - E22

KW - E32

KW - E44

KW - E60

KW - G28

U2 - 10.1016/j.jedc.2016.05.011

DO - 10.1016/j.jedc.2016.05.011

M3 - Journal article

SN - 0165-1889

VL - 69

SP - 89

EP - 111

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

ER -

Endogenous credit standards and aggregate fluctuations

Abstract

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