Lending standards and output growth

Divya Kirti

Journal of Financial Stability, 2025, vol. 76, issue C

Abstract: What drives macro-financial vulnerabilities? Inspired by Minsky–Kindleberger narratives, one prominent view emphasizes that lending standards repeatedly deteriorate in good times, creating exposure to widespread reassessments of risk. Another emphasizes that leverage amplifies negative shocks. This paper constructs panel data on lending standards and uses it to show that Minsky–Kindleberger dynamics interact with leverage. Standards erode with improving economic performance, but do not always co-move with aggregate leverage. The combination of deteriorating standards and leverage—above and beyond leverage alone—signals poor subsequent macroeconomic performance. Inconsistent with models incorporating rational expectations, this poor subsequent performance is systematically reflected in forecast errors.

Keywords: Lending standards; Behavioral macro-finance; Minsky–Kindleberger (search for similar items in EconPapers)
Date: 2025
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Related works:
Working Paper: Lending Standards and Output Growth (2018)
Working Paper: Lending standards and output growth (2018)
Working Paper: Lending standards and output growth (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:76:y:2025:i:c:s1572308924001360

DOI: 10.1016/j.jfs.2024.101351

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