Lending standards, productivity, and credit crunches
Abstract
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.
Citation
Swarbrick , J 2023 , ' Lending standards, productivity, and credit crunches ' , Macroeconomic Dynamics , vol. 27 , no. 2 , pp. 456-481 . https://doi.org/10.1017/S1365100521000481
Publication
Macroeconomic Dynamics
Status
Peer reviewed
ISSN
1365-1005Type
Journal article
Description
Funding: This 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.Collections
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