Lending standards, productivity, and credit crunches
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We propose a macroeconomic model in which adverse selection in investment amplifies macroeconomic fluctuations, in line with the prominent role played by the credit crunch during the financial crisis. Endogenous lending standards emerge due to an informational asymmetry between borrowers and lenders about the riskiness of borrowers. By using loan approval probability as a screening device, banks ration credit following increases in lending risk, generating large endogenous movements in TFP, explaining why productivity often falls during crises. Furthermore, the mechanism implies that financial instability is heightened when interest rates are low.
Swarbrick , J 2021 , ' Lending standards, productivity, and credit crunches ' , Macroeconomic Dynamics , vol. First View . https://doi.org/10.1017/S1365100521000481
Copryight © The Author(s), 2021. Published by Cambridge University Press. This work has been made available online in accordance with publisher policies or with permission. Permission for further reuse of this content should be sought from the publisher or the rights holder. This is the author created accepted manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://doi.org/10.1017/S1365100521000481
DescriptionThis paper was based on a doctoral thesis chapter; the financial support by the Economic and Social Research Council [grant number ES/J500148/1] during this time is gratefully acknowledged.
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