 Boundedly rational banks’ contribution to the credit cycleTobias F. Rötheli Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), 2012, vol. 41, issue 5, 730-737 Abstract: We investigate how banks’ boundedly rational learning influences their views about default risks over the business cycle. Our analysis details the direction and the magnitude of these effects assuming that banks update probability in a Bayesian way. With a limited experience span lenders are liable to overestimate (underestimate) losses from defaulting loans early (late) in the boom. Depending on their experience span, banks turn over-optimistic and underprice default risk 3–5 years into the boom. During recessions an overpricing of risk begins just quarters into the recession. Our simulations are calibrated with U.S. data and provide evidence for the view that banks contribute to excessive lending during the upswing and to credit crunches in recessions. Keywords: Boundedly rational learning; Loan-loss expectations; Credit cycle (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:soceco:v:41:y:2012:i:5:p:730-737 DOI: 10.1016/j.socec.2012.07.005 Access Statistics for this article Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics) is currently edited by Pablo Brañas Garza More articles in Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics) from Elsevier |
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