LENDER EXPERTISE AND PROPAGATION OF CREDIT SHOCKS

Garey Ramey
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Garey Ramey: University of California, San Diego

No 676, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops a multi-sector version of the credit matching model of Den Haan, Ramey and Watson (Journal of Monetary Economics, 2003). Households rely on specialized lenders to channel savings to productive investments. Lender expertise is sector-specific. Following a negative shock to one sector, savings cannot be easily shifted to other sectors because lender expertise in these sectors can be built up only gradually. This leads to a reduction in overall savings flow that adversely affects lenders in every sector. This liquidity spillover effect causes credit shocks to be sharper, more widespread, and more persistent. Numerical simulations illustrate the potential for this mechanism to generate quantitatively important effects. Policy interventions that can limit the liquidity spillover effect are discussed.

Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed009:676

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