Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 202 Abstract:
A model of credit rationing based on asymmetrically informed borrowers and lenders is developed. In this context, sufficient conditions are derived for an appropriate government policy response to credit rationing to be a continuously open discount window. It is also demonstrated that such a policy can be deflationary, and that given a commitment to operate in this way, the monopoly issue of liabilities can Pareto dominate their competitive issuance.
Stichwort: Federal lending, Government loans, Jaffee-Russel model, Assymetric information, and Credit limit Fach: E51 - Money Supply; Credit; Money Multipliers, H81 - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts, and D82 - Asymmetric and Private Information; Mechanism Design
Creator: Bordo, Michael D., Rappoport, Peter., and Schwartz, Anna J. (Anna Jacobson), 1915-2012. Series: Monetary theory and financial intermediation Abstract:
In this paper we examine the evidence for two competing views of how monetary and financial disturbances influenced the real economy during the national banking era, 1880-1914. According to the monetarist view, monetary disturbances affected the real economy through changes on the liability side of the banking system's balance sheet independent of the composition of bank portfolios. According to the credit rationing view, equilibrium credit rationing in a world of asymmetric information can explain short-run fluctuations in real output. Using structural VARs we incorporate monetary variables in credit models and credit variables in monetarist models, with inconclusive results. To resolve this ambiguity, we invoke the institutional features of the national banking era. Most of the variation in bank loans is accounted for by loans secured by stock, which in turn reflect volatility in the stock market. When account is taken of the stock market, the influence of credit in the VAR model is greatly reduced, while the influence of money remains robust. The breakdown of the composition of bank loans into stock market loans (traded in open asset markets) and other business loans (a possible setting for credit rationing) reveals that other business loans remained remarkably stable over the business cycle.
Fach: N21 - Economic History: Financial Markets and Institutions: U.S.; Canada: Pre-1913 and N11 - Macroeconomics and monetary economics ; Growth and fluctuations - United States ; Canada : Pre-1913
Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 522 Abstract:
We consider a two country growth model with international capital markets. These markets fund capital investment in both countries, and operate subject to a costly state verification (CSV) problem. Investors in each country require some external finance, but also provide internal finance, which mitigates the CSV problem. When two identical (except for their initial capital stocks) economies are closed, they necessarily converge monotonically to the same steady state output level. Unrestricted international financial trade precludes otherwise identical economies from converging, and poor countries are necessarily net lenders to rich countries. Oscillation in real activity and international capital flows can occur.
Stichwort: Credit, Closed economy, Credit rationing, CSV, Open economy, Costly state verification, International lending, International capital markets, and Capital investment Fach: O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance and F34 - International Lending and Debt Problems
Creator: Azariadis, Costas. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Finance, fluctuations, and development Abstract:
We study a variant of the one-sector neoclassical growth model of Diamond in which capital investment must be credit financed, and an adverse selection problem appears in loan markets. The result is that the unfettered operation of credit markets leads to a one-dimensional indeterminacy of equilibrium. Many equilibria display economic fluctuations which do not vanish asymptotically; such equilibria are characterized by transitions between a Walrasian regime in which the adverse selection problem does not matter, and a regime of credit rationing in which it does. Moreover, for some configurations of parameters, all equilibria display such transitions for two reasons. One, the banking system imposes ceilings on credit when the economy expands and floors when it contracts because the quality of public information about the applicant pool of potential borrowers is negatively correlated with the demand for credit. Two, depositors believe that returns on bank deposits will be low (or high): these beliefs lead them to transfer savings out of (into) the banking system and into less (more) productive uses. The associated disintermediation (or its opposite) causes banks to contract (expand) credit. The result is a set of equilibrium interest rates on loans that validate depositors' original beliefs. We investigate the existence of perfect foresight equilibria displaying periodic (possibly asymmetric) cycles that consist of m periods of expansion followed by n periods of contraction, and propose an algorithm that detects all such cycles.
Stichwort: Interest rates, Equilibrium, Credit markets, and Business cycles Fach: E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers, E44 - Money and interest rates - Financial markets and the macroeconomy, O41 - One, Two, and Multisector Growth Models, and E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles
Creator: Chari, V. V., Christiano, Lawrence J., and Eichenbaum, Martin S. Series: Finance, fluctuations, and development Abstract:
Different monetary aggregates covary very differently with short term nominal interest rates. Broad monetary aggregates like Ml and the monetary base covary positively with current and future values of short term interest rates. In contrast, the nonborrowed reserves of banks covary negatively with current and future interest rates. Observations like this 'sign switch' lie at the core of recent debates about the effects of monetary policy actions on short term interest rates. This paper develops a general equilibrium monetary business cycle model which is consistent with these facts. Our basic explanation of the 'sign switch' is that movements in nonborrowed reserves are dominated by exogenous shocks to monetary policy, while movements in the base and Ml are dominated by endogenous responses to non-policy shocks.
Stichwort: Monetary policy, Interest, Money, Shocks, Inside money, and Interest rates Fach: E43 - Money and interest rates - Determination of interest rates ; Term structure of interest rates and E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers
Creator: Lacker, Jeffrey Malcolm. Series: Foundations of policy toward electronic money Abstract:
Briefly reviews the potential consequences of electronic money for the management of the government's balance sheet through open market operations and for the regulations governing the public and private issue of payment instruments.
Stichwort: Monetary policy, Electronic money, and Payment instruments Fach: E58 - Monetary policy, central banking, and the supply of money and credit - Central banks and their policies, E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, and E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems
Creator: Cole, Harold Linh, 1957-, Dow, James, 1961 -, and English, William B. (William Berkeley), 1960- Series: International perspectives on debt, growth, and business cycles Abstract:
We consider a model of international sovereign debt where repayment is enforced because defaulting nations lose their reputation and consequently, are excluded from international capital markets. Underlying the analysis of reputation is the hypothesis that borrowing countries have different, unobservable, attitudes towards the future. Some regimes are relatively myopic, while others are willing to make sacrifices to preserve their access to debt markets. Nations' preferences, while unobservable, are not fixed but evolve over time according to a Markov process. We make two main points. First we argue that in models of sovereign debt the length of the punishment interval that follows a default should be based on economic factors rather than being chosen arbitrarily. In our model, the length of the most natural punishment interval depends primarily on the preference parameters. Second, we point out that there is a more direct way for governments to regain their reputation. By offering to partially repay loans in default, a government can signal its reliability. This type of signaling can cause punishment interval equilibria to break down. We examine the historical record on lending resumption to argue that in almost all cases, some kind of partial repayment was made.
Fach: H63 - National budget, deficit, and debt - Debt ; Debt management and F34 - International finance - International lending and debt problems
Creator: Prescott, Edward C. and Townsend, Robert M., 1948- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 203 Abstract:
General competitive analysis is extended to cover a dynamic, pure-exchange economy with privately observed shocks to preferences. In the linear, infinite-dimensional space containing lotteries we establish the existence of optima, the existence of competitive equilibria, and that every competitive equilibrium is an optimum. An example illustrates that rationing and securities with contrived risk have an equilibrium interpretation.
Stichwort: Lotteries, Competitive equilibria, and Pure exchange Fach: D82 - Asymmetric and Private Information; Mechanism Design and D51 - Exchange and Production Economies