Lending standards, productivity, and credit crunches

Jonathan  Swarbrick

doi:10.1017/S1365100521000481

Lending standards, productivity, and credit crunches

Jonathan Swarbrick^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Pages (from-to)	456-481
Number of pages	26
Journal	Macroeconomic Dynamics
Volume	27
Issue number	2
Early online date	15 Nov 2021
DOIs	https://doi.org/10.1017/S1365100521000481
Publication status	Published - 7 Mar 2023

Keywords

Adverse selection
Credit frictions
Total factor productivity
Business cycles
Credit crunches
Lending standards
Low interest rates

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10.1017/S1365100521000481

Swabrick_2021_MD_Lending_AAM
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
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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.",

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AB - 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.

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KW - Credit frictions

KW - Total factor productivity

KW - Business cycles

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KW - Low interest rates

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Lending standards, productivity, and credit crunches

Abstract

Keywords

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