Post on 17-Dec-2015
transcript
MACROECONOMIC IMPLICATIONS OF
FINANCIAL CONSTRAINTS
1. Credit crunch.
9th set of transparencies for ToCF
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INTRODUCTION
GREAT DEPRESSION Irving Fisher (EMA 1933): aggrevated by "poor performance" of
financial marketsDEBT DEFLATION
Bernanke (1983): breakdown in banking. Friedman-Schwartz (1963): role of money supply.
BALANCE SHEET CHANNEL vs
LENDING CHANNELTypical pattern:
Recession, high interest rates
weak balance sheets of firms
loan losses + low asset prices reduce equity in financial sector.
Two sectors (real + financial) are constrained.
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US 1990-91 recession (rather typical)
banks: reduction in capital ratio decline in bank lending
Same pattern in the wake of a tight money episode (Romer-Romer BPEA 1990).
Modeling : Apply logic of credit rationing to the two tiers.
flight to quality
– credit crunch hits poor firms first– large/healthy firms can go to CP or bond markets.
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MODEL
Have 1 project / idea each
Moral hazard:
Risk neutral parties borrowers (firms) monitors (banks) investors
("firms")
return R
(success)
Investment costI
Verifiable 0
(failure)
(only good project is viable)
BORROWERS
good bad(low private
benefit)
Versions of the project
Bad (high private
benefit)
Private benefit:Prob( R)
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Have assets Cumulative distribution G(A).
("financial intermediaries", "banks")
can rule out high private benefit bad project of borrower at cost c (moral hazard).
uninformed / free riding (actually: implication of the model),
Exogenous interest rate:access to "storagefacility" yieldinginterest rate i.
Endogenous interest rate:savings.
demand expected return
MONITORS
INVESTORS
Total assets of intermediaries = Km.
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CertificationIntermediation
Venture capitalist Lead investment bank Bankers acceptances(commercial paper)Partial securitization of a loan.
Bank loan(on balance sheet).
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Because firm wants to use as little informed capital as possible:
Firm gets financed if it has assets where
EQUILIBRIUM
is increasing in .
M:
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COMPARATIVE STATICS3 types of recessions
Lending channel
Classical recession Balance
sheet channel
Correlation. Leads and lags
In the three types of capital squeeze, aggregate investment goes down and goes up.
Credit crunch Industrial recession Shortage of savings[Intermediaries] [Firms]
parameter of first order stochastic dominance
[Investors]
or
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VARIABLE INVESTMENT SCALE
solvency ratio of banks (intermediation) increases
equity ratio of firms
A decrease in Km (credit crunch)
decreases increases decreases
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r increases with c
Intermediation (banks) vs certification (venture capital)
Banks have become low-intensity monitors over the years.
Certifiers have r = 1!
High monitoring intensity high solvency requirements.
Finance companies, firms themselves are higher- intensity monitors better capitalized.