Credit market heterogeneity, balance sheet (in)dependence, financial shocks

Chris Garbers () and Guangling Liu ()
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Chris Garbers: Department of Economics, University of Stellenbosch

No 15/2016, Working Papers from Stellenbosch University, Department of Economics

Abstract: This paper presents a real business cycle model with financial frictions and two credit markets to investigate the qualitative and quantitative relevance of credit market heterogeneity. To address this line of inquiry we contrast the transmission of financial shocks in an economy where loans are the only form of credit to one in which both loans and bonds exist. We estimate the model using Bayesian methods over the sample period 1985Q1 - 2015Q1 for the U.S. economy. We find that credit market heterogeneity plays an important role in attenuating the impact of financial shocks by allowing borrowers to substitute away from the affected credit market. The shock attenuation property of credit market heterogeneity works through asset prices and substitution toward alternative credit types. Bank balance sheet linkages reduce the shock attenuation effect associated with heterogeneous credit markets. The origination of financial shocks can influence both the size and the persistence of their impact.

Keywords: Credit Market; Business Cycle; Financial Intermediation; Operational Diversification; Heterogeneity; DSGE (search for similar items in EconPapers)
JEL-codes: E20 E32 E43 E44 E51 E52 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-dge and nep-mac
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