Collateral Shocks, Lending Relationships and Economic Dynamics

Vivek Sharma

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: What are the effects of changing bank lending conditions in a model in which borrowers have endogenously-persistent credit relationships with lenders? This paper answers this question in a simple Two-Agent New Keynesian (TANK) setup. Fluctuations in collateral requirements, termed collateral shocks in this paper, result in a rise in spread, a drop in bank credit and amplification of macroeconomic volatility. These effects are amplified by presence of lending relationships and are greater at higher persistence and volatility of the collateral shocks. The results in this paper underscore that credit relationships matter when collateral shocks hit the economy and a model that assumes away the existence of these lending relationships, risks underestimating their effects.

Keywords: Collateral Shocks; Lending Relationships; Economic Activity (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2023-10
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2023-49

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