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Lending Standards, Productivity and Credit Crunches

Jonathan Swarbrick ()

Staff Working Papers from Bank of Canada

Abstract: We propose a macroeconomic model in which adverse selection in investment drives the amplification of macroeconomic fluctuations, in line with prominent roles played by the credit crunch and collapse of the asset-backed security market in the financial crisis. Endogenous lending standards emerge due to an informational asymmetry between borrowers and lenders about the riskiness of borrowers. By using loan approval probability as a screening device, banks ration credit following financial disturbances, generating large endogenous movements in total factor productivity, explaining why productivity often falls during crises. Furthermore, the mechanism implies that financial instability is heightened when interest rates are low.

Keywords: Business fluctuations and cycles; Credit and credit aggregates; Financial markets; Financial stability; Interest rates; Productivity (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 G01 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2019-07
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:19-25

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