Shocks to the Lending Standards and the Macroeconomy

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. Show more