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Lending standards and macroeconomic dynamics

Pedro Gete ()

No 2207, Working Paper Series from European Central Bank

Abstract: This paper proposes a tractable way to incorporate lending standards ("credit qualification thresholds") into macro models of financial frictions. Banks can reject borrowers whose risk is above an endogenous threshold at which no lending rate sufficiently compensates banks for the borrowers’ default risk. Firms denied credit cut employment and labor reallocates mostly towards safer producers. Lending standards propagate bank capital shortfalls through labor misallocation causing deeper and more persistent real effects. The paper also shows that lending spreads are insufficient indicators of credit supply disruptions. That is, for the same increase in credit spreads, output falls faster when denial rates are increasing. Finally, with endogenous lending standards, first-moment bank capital shocks look like second-moment shocks. JEL Classification: E32, E44, E47, G2

Keywords: bank capital; bank losses; extensive margin; labor reallocation; lending standards; misallocation (search for similar items in EconPapers)
Date: 2018-11
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20182207

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