Did Consumers Want Less Debt? Consumer Credit Demand versus Supply in the Wake of the 2008-2009 Financial Crisis
Reint E. Gropp, J. Krainer, E. Laderman
Abstract
We explore the sources of household balance sheet adjustment following the collapse of the housing market in 2006. First, we use microdata from the Federal Reserve Board’s Senior Loan Officer Opinion Survey to document that banks cumulatively tightened consumer lending standards more in counties that experienced a house price boom in the mid-2000s than in non-boom counties. We then use the idea that renters, unlike homeowners, did not experience an adverse wealth shock when the housing market collapsed to examine the relative importance of two explanations for the observed deleveraging and the sluggish pickup in consumption after 2008. First, households may have optimally adjusted to lower wealth by reducing their demand for debt and implicitly, their demand for consumption. Alternatively, banks may have been more reluctant to lend in areas with pronounced real estate declines. Our evidence is consistent with the second explanation. Renters with low risk scores, compared to homeowners in the same markets, reduced their levels of nonmortgage debt and credit card debt more in counties where house prices fell more. The contrast suggests that the observed reductions in aggregate borrowing were more driven by cutbacks in the provision of credit than by a demand-based response to lower housing wealth.
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Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity
Franziska Bremus, Claudia M. Buch, K. Russ, Monika Schnitzer
NBER Working Paper No. 19093,
2013
Abstract
Does the mere presence of big banks affect macroeconomic outcomes? In this paper, we develop a theory of granularity (Gabaix, 2011) for the banking sector, introducing Bertrand competition and heterogeneous banks charging variable markups. Using this framework, we show conditions under which idiosyncratic shocks to bank lending can generate aggregate fluctuations in the credit supply when the banking sector is highly concentrated. We empirically assess the relevance of these granular effects in banking using a linked micro-macro dataset of more than 80 countries for the years 1995-2009. The banking sector for many countries is indeed granular, as the right tail of the bank size distribution follows a power law. We then demonstrate granular effects in the banking sector on macroeconomic outcomes. The presence of big banks measured by high market concentration is associated with a positive and significant relationship between bank-level credit growth and aggregate growth of credit or gross domestic product.
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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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Crises, rescues, and policy transmission through international banks
Claudia M. Buch
Bundesbank Discussion Paper 15/2011,
2011
Abstract
The World Financial Crisis has shaken the fundamentals of international banking
and triggered a downward spiral of asset prices. To prevent a further meltdown of
markets, governments have intervened massively through rescues measures aimed at recapitalizing banks and through liquidity support. We use a detailed, banklevel dataset for German banks to analyze how the lending and borrowing of their foreign affiliates has responded to domestic (German) and to US crisis support schemes. We analyze how these policy interventions have spilled over into
foreign markets. We identify loan supply shocks by exploiting that not all banks
have received policy support and that the timing of receiving support measures
has differed across banks. We find that banks covered by rescue measures of the
German government have increased their foreign activities after these policy
interventions, but they have not expanded relative to banks not receiving support.
Banks claiming liquidity support under the Term Auction Facility (TAF) program
have withdrawn from foreign markets outside the US, but they have expanded
relative to affiliates of other German banks.
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Introducing Financial Frictions and Unemployment into a Small Open Economy Model
Mathias Trabandt, Lawrence J. Christiano, Karl Walentin
Journal of Economic Dynamics & Control,
No. 12,
2011
Abstract
Which are the main frictions and the driving forces of business cycle dynamics in an open economy? To answer this question we extend the standard new Keynesian model in three dimensions: we incorporate financing frictions for capital, employment frictions for labor and extend the model into a small open economy setting. We estimate the model on Swedish data. Our main results are that (i) a financial shock is pivotal for explaining fluctuations in investment and GDP. (ii) The marginal efficiency of investment shock has negligible importance. (iii) The labor supply shock is unimportant in explaining GDP and no high frequency wage markup shock is needed.
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Optimum Currency Areas in Emerging Market Regions: Evidence Based on the Symmetry of Economic Shocks
Stefan Eichler, Alexander Karmann
Open Economies Review,
No. 5,
2011
Abstract
This paper examines which emerging market regions form optimum currency areas (OCAs) by assessing the symmetry of macroeconomic shocks. We extend the output-prices-VAR framework by adding net exports and the real effective exchange rate as endogenous variables. Based on theoretical considerations, we derive which shocks affect these variables in the long run: shocks to labor productivity, foreign trade, labor supply, and money supply. The considered economies of Central and Eastern Europe, the Commonwealth of Independent States, East and Southeast Asia, and South Asia, exhibit large enough shock symmetry to form a currency union; the economies of Africa, Latin America, and the Middle East do not.
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Macroeconomic Challenges in the Euro Area and the Acceding Countries
Katja Drechsel
Dissertation, Fachbereich Wirtschaftswissenschaften der Universität Osnabrück,
2010
Abstract
deutscher Titel: Makroökonomische Herausforderungen für die Eurozone und die Beitrittskandidaten
Abstract: The conduct of effective economic policy faces a multiplicity of macroeconomic challenges, which requires a wide scope of theoretical and empirical analyses. With a focus on the European Union, this doctoral dissertation consists of two parts which make empirical and methodological contributions to the literature on forecasting real economic activity and on the analysis of business cycles in a boom-bust framework in the light of the EMU enlargement. In the first part, we tackle the problem of publication lags and analyse the role of the information flow in computing short-term forecasts up to one quarter ahead for the euro area GDP and its main components. A huge dataset of monthly indicators is used to estimate simple bridge equations. The individual forecasts are then pooled, using different weighting schemes. To take into consideration the release calendar of each indicator, six forecasts are compiled successively during the quarter. We find that the sequencing of information determines the weight allocated to each block of indicators, especially when the first month of hard data becomes available. This conclusion extends the findings of the recent literature. Moreover, when combining forecasts, two weighting schemes are found to outperform the equal weighting scheme in almost all cases. In the second part, we focus on the potential accession of the new EU Member States in Central and Eastern Europe to the euro area. In contrast to the discussion of Optimum Currency Areas, we follow a non-standard approach for the discussion on abandonment of national currencies the boom-bust theory. We analyse whether evidence for boom-bust cycles is given and draw conclusions whether these countries should join the EMU in the near future. Using a broad range of data sets and empirical methods we document credit market imperfections, comprising asymmetric financing opportunities across sectors, excess foreign currency liabilities and contract enforceability problems both at macro and micro level. Furthermore, we depart from the standard analysis of comovements of business cycles among countries and rather consider long-run and short-run comovements across sectors. While the results differ across countries, we find evidence for credit market imperfections in Central and Eastern Europe and different sectoral reactions to shocks. This gives favour for the assessment of the potential euro accession using this supplementary, non-standard approach.
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Investor Rationality and House Price Bubbles: The Case of Berlin and the German Reunification
Oliver Holtemöller, R. Schulz
German Economic Review,
2010
Abstract
We analyze the behavior of investors in the Berlin rental apartment house market over the years 1980–2004. Using constant-quality multipliers (price–rent ratios), we reject the hypothesis that multipliers in the market were set in a rational manner. Supported by narrative evidence, we conjecture that investors misjudged the economic effects of the German reunification. To examine this, we employ a stylized structural economic model and analyze the effects of shocks on rational multipliers. It seems that investors confused the reunification with a permanent supply side shock to the economy. By basing their investment decisions on this misjudgement, investors behaved irrationally, but in a very uncertain and unprecedented environment.
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Real Estate Prices and Bank Stability
Michael Koetter, Tigran Poghosyan
Journal of Banking and Finance,
No. 34,
2010
Abstract
Real estate prices can deviate from their fundamental value due to rigid supply, heterogeneity in quality, and various market imperfections, which have two contrasting effects on bank stability. Higher prices increase the value of collateral and net wealth of borrowers and thus reduce the likelihood of credit defaults. In contrast, persistent deviations from fundamentals may foster the adverse selection of increasingly risky creditors by banks seeking to expand their loan portfolios, which increases bank distress probabilities. We test these hypotheses using unique data on real estate markets and banks in Germany. House price deviations contribute to bank instability, but nominal house price developments do not. This finding corroborates the importance of deviations from the fundamental value of real estate, rather than just price levels or changes alone, when assessing bank stability.
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Low Skill but High Volatility?
Claudia M. Buch
CESifo Working Paper No. 2665,
2009
Abstract
Globalization may impose a double-burden on low-skilled workers. On the one hand, the relative supply of low-skilled labor increases. This suppresses wages of low-skilled workers and/or increases their unemployment rates. On the other hand, low-skilled workers typically face more limited access to financial markets than high-skilled workers. This limits their ability to smooth shocks to income intertemporally and to share risks across borders. Using cross-country, industry-level data for the years 1970 - 2004, we document how the volatility of hours worked and of wages of workers at different skill levels has changed over time. We develop a stylized theoretical model that is consistent with the empirical evidence, and we test the predictions of the model. Our results show that greater financial globalization and development increases the volatility of employment, and this effect is strongest for low-skilled workers. A higher share of low-skilled employment has a dampening impact.
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