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Credit Crunches from Occasionally Binding Bank Borrowing Constraints

Tom Holden (), Paul Levine () and Jonathan Swarbrick ()

Staff Working Papers from Bank of Canada

Abstract: We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the countercyclical, positively skewed equity issuance that are characteristic of the credit crunches observed in the data.

Keywords: Business fluctuations and cycles; Credit and credit aggregates; Economic models; Financial markets (search for similar items in EconPapers)
JEL-codes: E22 E32 E51 G2 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2017
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Related works:
Journal Article: Credit Crunches from Occasionally Binding Bank Borrowing Constraints (2020) Downloads
Working Paper: Credit crunches from occasionally binding bank borrowing constraints (2018) Downloads
Working Paper: Credit crunches from occasionally binding bank borrowing constraints (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-57

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