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Shocks to the Lending Standards and the Macroeconomy

Author

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  • Vivek Sharma

Abstract

This paper presents a model in which firms have endogenously-persistent lending relationships with banks which compete both on interest rates and collateral requirements. The economy features an endogenously-evolving lending standard which is subject to an exogenous shock. A shock to bank lending standards in this model leads to a spike in spread, drop in bank credit and amplification of macroeconomic volatility. These effects are higher at greater intensity and persistence of the lending relationships. This work shines a spotlight on how shocks to lending standards can have wider macroeconomic implications and shows how financial shocks can affect real economy.

Suggested Citation

  • Vivek Sharma, 2023. "Shocks to the Lending Standards and the Macroeconomy," CAMA Working Papers 2023-55, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2023-55
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2023-11/55_2023_sharma.pdf
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    More about this item

    Keywords

    Lending Standards; Deep Habits in Banking; Macroeconomic Fluctuations;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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