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Lending standards, productivity, and credit crunches

Part of: Mathematical economics

Published online by Cambridge University Press:  15 November 2021

Jonathan Swarbrick
Jonathan Swarbrick*
Affiliation:
University of St Andrews
*
Corresponding author. Email: j.m.swarbrick@outlook.com
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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.

Keywords

Adverse selectioncredit crunchestotal factor productivitybusiness cycles

MSC classification

Primary: 91B24: Price theory and market structure 91B64: Macro-economic models (monetary models, models of taxation) 91B70: Stochastic models
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 2 , March 2023 , pp. 456 - 481
Copyright
© The Author(s), 2021. Published by Cambridge University Press

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