Financial Factors in Macroeconometric Models
Sebastian Giesen
Volkswirtschaft, Ökonomie, Shaker Verlag GmbH, Aachen,
2013
Abstract
The important role of credit has long been identified as a key factor for economic development (see e.g. Wicksell (1898), Keynes (1931), Fisher (1933) and Minsky (1957, 1964)). Even before the financial crisis most researchers and policy makers agreed that financial frictions play an important role for business cycles and that financial turmoils can result in severe economic downturns (see e.g. Mishkin (1978), Bernanke (1981, 1983), Diamond (1984), Calomiris (1993) and Bernanke and Gertler (1995)). However, in practice researchers and policy makers mostly used simplified models for forecasting and simulation purposes. They often neglected the impact of financial frictions and emphasized other non financial market frictions when analyzing business cycle fluctuations (prominent exceptions include Kiyotaki and Moore (1997), Bernanke, Gertler, and Gilchrist (1999) and Christiano, Motto, and Rostagno (2010)). This has been due to the fact that most economic downturns did not seem to be closely related to financial market failures (see Eichenbaum (2011)). The outbreak of the subprime crises ― which caused panic in financial markets and led to the default of Lehman Brothers in September 2008 ― then led to a reconsideration of such macroeconomic frameworks (see Caballero (2010) and Trichet (2011)). To address the economic debate from a new perspective, it is therefore necessary to integrate the relevant frictions which help to explain what we have experienced during recent years.
In this thesis, I analyze different ways to incorporate relevant frictions and financial variables in macroeconometric models. I discuss the potential consequences for standard statistical inference and macroeconomic policy. I cover three different aspects in this work. Each aspect presents an idea in a self-contained unit. The following paragraphs present more detail on the main topics covered.
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Payment Defaults and Interfirm Liquidity Provision
F. Boissay, Reint E. Gropp
Review of Finance,
No. 6,
2013
Abstract
Using a unique data set on French firms, we show that credit constrained firms that face liquidity shocks are more likely to default on their payments to suppliers. Credit constrained firms pass on a sizeable fraction of such shocks to their suppliers. This is consistent with the idea that firms provide liquidity insurance to each other and that this mechanism is able to alleviate credit constraints. We show that the chain of defaults stops when it reaches unconstrained firms. Liquidity appears to be allocated from firms with access to outside finance to credit constrained firms along supply chains.
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Foreign Bank Entry, Credit Allocation and Lending Rates in Emerging Markets: Empirical Evidence from Poland
Hans Degryse, Olena Havrylchyk, Emilia Jurzyk, Sylwester Kozak
Journal of Banking and Finance,
No. 11,
2012
Abstract
Earlier studies have documented that foreign banks charge lower lending rates and interest spreads than domestic banks. We hypothesize that this may stem from the superior efficiency of foreign entrants that they decide to pass onto borrowers (“performance hypothesis”), but could also reflect a different loan allocation with respect to borrower transparency, loan maturity and currency (“portfolio composition hypothesis”). We are able to differentiate between the above hypotheses thanks to a novel dataset containing detailed bank-specific information for the Polish banking industry. Our findings demonstrate that banks differ significantly in terms of portfolio composition and we attest to the “portfolio composition hypothesis” by showing that, having controlled for portfolio composition, there are no differences in lending rates between banks.
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Credit Allocation and Value Creation of Banks: The Impact of Relationship Banking in Normal and Crisis-times
Hans Degryse, Steven Ongena
Revue d'économie financière,
No. 106,
2012
Abstract
Cet article passe en revue la littérature sur l’allocation de crédit et la création de valeur par les banques. Il se concentre sur l’activité de banque relationnelle, à savoir le fait qu’une banque et un emprunteur se lancent dans de multiples interactions et que chacun des deux agents s’efforce d’obtenir des informations spécifiques sur l’autre. Il montre comment la banque relationnelle génère des coûts et des bénéfices à la fois pour les entreprises et pour les banques, mais qu’en règle générale, elle est source de valeur pour chacun d’eux. Néanmoins, l’incidence de ce type de relation est en grande partie fonction du contexte économique (période normale ou période de crise). Est aussi abordée la manière dont l’allocation de crédit, mesurée par la spécialisation sectorielle, affecte les entreprises et les banques. Enfin, l’examen de la littérature récente en matière de titrisation et de relation bancaire permet de mettre en évidence la manière dont la titrisation affecte les effets de la banque relationnelle.
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Rules versus Discretion in Loan Rate Setting
Geraldo Cerqueiro, Hans Degryse, Steven Ongena
Journal of Financial Intermediation,
No. 4,
2011
Abstract
Loan rates for seemingly identical borrowers often exhibit substantial dispersion. This paper investigates the determinants of the dispersion in interest rates on loans granted by banks to small and medium sized enterprises. We associate this dispersion with the loan officers’ use of “discretion” in the loan rate setting process. We find that “discretion” is most important if: (i) loans are small and unsecured; (ii) firms are small and opaque; (iii) the firm operates in a large and highly concentrated banking market; and (iv) the firm is distantly located from the lender. Consistent with the proliferation of information-technologies in the banking industry, we find a decreasing role for “discretion” over time in the provision of small credits to opaque firms. While widely used in the pricing of loans, “discretion” plays only a minor role in the decisions to grant loans.
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The Importance of Estimation Uncertainty in a Multi-Rating Class Loan Portfolio
Henry Dannenberg
IWH Discussion Papers,
No. 11,
2011
Abstract
This article seeks to make an assessment of estimation uncertainty in a multi-rating class loan portfolio. Relationships are established between estimation uncertainty and parameters such as probability of default, intra- and inter-rating class correlation, degree of inhomogeneity, number of rating classes used, number of debtors and number of historical periods used for parameter estimations. In addition, by using an exemplary portfolio based on Moody’s ratings, it becomes clear that estimation uncertainty does indeed have an effect on interest rates.
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New IMF Lending Facilities and Financial Stability in Emerging Markets
J. John, Tobias Knedlik
Economic Analysis and Policy,
No. 2,
2011
Abstract
In the light of the current global financial and economic crisis, the International Monetary Fund (IMF) has undertaken some major reforms of its lending facilities. The new Flexible Credit Line and the High Access Precautionary Arrangements differ from what has been in place so far, by allowing for ex ante conditionality. This paper summarizes preconditions for effective last resort lending and evaluates the newly introduced measures, concluding that the Flexible Credit Line comes very close to what has been called an International Lender of Last Resort. The main obstacles are the low demand and slow progress in complementary reforms.
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What Can Currency Crisis Models Tell Us about the Risk of Withdrawal from the EMU? Evidence from ADR Data
Stefan Eichler
Journal of Common Market Studies,
No. 4,
2011
Abstract
We study whether ADR (American depositary receipt) investors perceive the risk that countries such as Greece, Ireland, Italy, Portugal or Spain could leave the eurozone to address financial problems produced by the sub-prime crisis. Using daily data, we analyse the impact of vulnerability measures related to currency crisis theories on ADR returns. We find that ADR returns fall when yield spreads of sovereign bonds or CDSs (credit default swaps) rise (i.e. when debt crisis risk increases); when banks' CDS premiums rise or stock returns fall (i.e. when banking crisis risk increases); or when the euro's overvaluation increases (i.e. when the risk of competitive devaluation increases).
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Informed and Uninformed Investment in Housing: The Downside of Diversification
Elena Loutskina, Philip E. Strahan
Review of Financial Studies,
No. 5,
2011
Abstract
Mortgage lenders that concentrate in a few markets invest more in information collection than diversified lenders. Concentrated lenders focus on the information-intensive jumbo market and on high-risk borrowers. They are better positioned to price risks and, thus, ration credit less. Adverse selection, however, leads to higher retention of mortgages relative to diversified lenders. Finally, concentrated lenders have higher profits than diversified lenders, their profits vary less systematically, and their stock prices fell less during the 2007—2008 credit crisis. The results imply that geographic diversification led to a decline in screening by lenders, which likely played a role in the 2007–2008 crisis.
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Central and Eastern European Countries in the Global Financial Crisis: A Typical Twin Crisis?
Diemo Dietrich, Tobias Knedlik, Axel Lindner
Post-Communist Economies,
No. 4,
2011
Abstract
This paper shows that during the Great Recession, banking and currency crises occurred simultaneously in Central and Eastern Europe. Events, however, differed widely from what happened during the Asian crisis that usually serves as the model case for the concept of twin crises. We look at three elements that help explaining the nature of events in Central and Eastern Europe: the problem of currency mismatches, the relation between currency and banking crises, and the importance of multinational banks for financial stability. It is shown that theoretical considerations concerning internal capital markets of multinational banks help understand what happened on capital markets and in the financial sector of the region. We discuss opposing effects of multinational banking on financial stability and find that institutional differences are the key to understand differing effects of the global financial crisis. In particular, we argue that it matters if international activities are organized by subsidiaries or by cross-border financial services, how large the share of foreign currency-denominated credit is and whether the exchange rate is fixed or flexible. Based on these three criteria we give an explanation why the pattern of the crisis in the Baltic States differed markedly from that in Poland and the Czech Republic, the two largest countries of the region.
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