Lending Standards, Credit Booms, and Monetary Policy

Elena Afanasyeva and Jochen Güntner

No 15115, Economics Working Papers from Hoover Institution, Stanford University

Abstract: This paper investigates the risk channel of monetary policy on the asset side of banks’ balance sheets. We use a factor-augmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Motivated by this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed the partial equilibrium contract in a New Keynesian DSGE model, and show that – consistent with our empirical findings – an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.

JEL-codes: D53 E44 E52 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2015-12-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Lending Standards, Credit Booms and Monetary Policy (2014)
Working Paper: Lending standards, credit booms and monetary policy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hoo:wpaper:15115

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