DOCSLIB.ORG

Eurozone Smes in the Credit Crisis

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Eurozone Smes in the Credit Crisis Eurozone SMEs in the credit crisis. Sarah Holton, Martina Lawless & Fergal McCann Central Bank of Ireland Motivation ◮ The financial crisis affected the economy through an important channel: ◮ Stress in interbank market led to "credit crunch" in the real economy (IMF, 2009). ◮ High government debt and deficit levels led to tensions in euro area sovereign bond markets. ◮ Limited information on how this is affecting firms, in particular in terms of bank credit. ◮ Small firms generally found to rely on bank financing or informal sources. Also found to struggle to access bank financing more than larger firms. , , SMEs in the credit crisis., 04/11/2011 2 Research Question ◮ We combine firm-level data from a survey on access to finance carried out by the European Central Bank (ECB) with macroeconomic variables. ◮ Exploiting cross-country, cross- time variation in the extent of the crises in the real, financial and sovereign sectors allows us to observe their relative effects on SME financing. ◮ Examine the factors that are relevant for firms’ demand for credit and for the supply of finance. ◮ both financing experience and perception of constraints. ◮ terms and conditions. , , SMEs in the credit crisis., 04/11/2011 3 Contribution ◮ Extends on SME access to finance literature by adding the important connection between finance and the real economy ◮ "As the real costs of intermediation increased, some borrowers (especially... small firms) found credit expensive to obtain. The effects... a protracted depression" Bernanke (1983) ◮ accounting for important features of the bank lending channel ◮ "The bank lending channel is based on the view that banks play a special role in the financial system because they are especially well suited to deal with certain types of borrowers, especially small firms" Mishkin (1995) ◮ taking account of variables that are important for credit supply ◮ "sovereign bond markets, have traditionally come to play a distinct role in the transmission of monetary policy in all advanced economies. This occurs via three channels... price channel... liquidity channel... balance sheet channel." (Gonzalez-Paramo, 25th November 2011) ◮ and credit demand. ◮ "contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete". (Rogoff, 2011) , , SMEs in the credit crisis., 04/11/2011 4 Existing Literature - cross country ◮ Beck, Demirguc-Kunt, Laeven, Maksimovic (JIMF 2006): Older, larger foreign owned firms report less financing obstacles and institutional development is the most important country characteristic explaining cross country variation in financing obstacles ◮ Beck, DK, Maksimovic (JFE 2008): Better institutional/legal system promotes use of external finance. Small firms benefit disproportionately from stronger property rights protection (bank effect). ◮ Beck, DK, Maksimovic (JMCB 2004): bank concentration impedes access to finance, but only when development and institutions are weak. Foreign banks, efficient credit registry increase SME access to credit. More government interference and ownership in banking impedes access. , , SMEs in the credit crisis., 04/11/2011 5 Existing Literature - Eurozone ◮ Using the SAFE dataset: ◮ Ferrando and Griesshaber (2011): Firm age and ownership are the most robust predictors regarding the existence of financing obstacles, results are mixed for size and economic branch. ◮ Artola and Genre (2011): Perceptions of financing obstacles were broadly based across firms, but those that really suffered tended to be small and young, while certain countries suffered more than others. ◮ Both find country dummies are significant in all cases , , SMEs in the credit crisis., 04/11/2011 6 Theoretical underpinnings on firm size and age ◮ Berger and Udell (2002): Transactions-based versus Relationship lending. ◮ Transactions lending: mainly financial statements. Also credit scoring, asset-based lending, leasing. ◮ Smaller firms are more opaque - there is less publicly available information on small firms. ◮ Banks are posed with a higher risk when lending to such firms - tougher lending conditions are likely. ◮ If bank is basing decisions on assets - small firms are less likely to have large collateral. ◮ Relationship lending can require a big investment on the part of the bank - if SMEs rely more on relationship lending, they may suffer as a result. ◮ Problems of financial statements and assets are also pertinent for young firms. , , SMEs in the credit crisis., 04/11/2011 7 Economic importance of SME finance access ◮ SMEs account for 99% of firms, 70% of employment (Eurostat) ◮ Firms who are constrained in accessing credit have been found to have higher likelihood of: ◮ Exiting the market (Osotimehin and Pappada 2010) ◮ Decreasing investment and shedding temporary employment (Benito and Hernando 2002) ◮ Lower employment, tech spending, capital investment, marketing expenditure, dividend payments. Campello et al. (JFE 2010) , , SMEs in the credit crisis., 04/11/2011 8 Results Preview ◮ Smaller and younger firms more likely to have problems accessing bank credit. ◮ Country dummies highly significant in explaining credit demand and supply. ◮ We try to explain these country effects using GDP growth, industrial order book survey data, private sector debt to GDP and sovereign yields in probit regressions of firm finance access. ◮ Sovereign yields and debt overhang appear relevant and negative for firms’ actual experience in accessing credit, while GDP growth and order book levels are not as important in this respect. ◮ On demand, GDP changes and debt overhang appear to matter the most. ◮ For interest rates and loan size offered, debt overhang, bank risk and sovereign risk appear to affect SMEs’ access to credit. , , SMEs in the credit crisis., 04/11/2011 9 Dataset The ECB and European Commission survey on the access to finance of small to medium sized enterprizes provides information on: ◮ general charactertics ◮ firm class sizes and age ◮ branches of economic activity ◮ turnover and ownership ◮ general information on situation of the firm ◮ most pressing problem ◮ change in debt situation ◮ financing of the firm ◮ sources of finance ◮ demand, availability and applications for different sources of financing ◮ terms and conditions of bank financing ◮ future, growth and obstacles to growth ◮ availabilty of finance , , SMEs in the credit crisis., 04/11/2011 10 Sample size by survey round and country H12009 H22009 H12010 H22010 Total Austria 224 203 200 500 1,127 Belgium 220 202 203 517 1,142 Germany 1,003 1,001 1,000 1,000 4,004 Spain 1,012 1,004 1,000 1,000 4,016 Finland 111 100 100 500 811 France 1,000 1,001 1,003 1,004 4,008 Greece 220 200 200 500 1,120 Ireland 110 101 100 500 811 Italy 1,006 1,004 1,000 1,000 4,010 Netherlands 323 252 256 502 1,333 Portugal 327 252 250 509 1,338 Total 5,556 5,320 5,312 7,532 23,720 , , SMEs in the credit crisis., 04/11/2011 11 Composition of the survey across 4 waves , , SMEs in the credit crisis., 04/11/2011 12 Other characteristics across 4 waves , , SMEs in the credit crisis., 04/11/2011 13 Change in firms’ demand for bank loans in previous six months Increased Unchanged Decreased Total No. % No. % No. % No. % Austria 160 20.4 467 59.4 159 20.2 786 100 Belgium 159 18 570 64.7 152 17.3 881 100 Germany 604 21.3 1,656 58.5 572 20.2 2,832 100 Spain 815 24.9 1,822 55.8 630 19.3 3,267 100 Finland 108 17.8 367 60.4 133 21.9 608 100 France 646 17.9 2,426 67.4 527 14.6 3,599 100 Greece 239 29.7 414 51.4 152 18.9 805 100 Ireland 130 19.3 409 60.8 134 19.9 673 100 Italy 802 24.4 1,950 59.4 531 16.2 3,283 100 Netherlands 185 20.4 509 56.1 214 23.6 908 100 Portugal 193 22 521 59.3 164 18.7 878 100 Total 4,041 21.8 11,111 60 3,368 18.2 18,520 100 , , SMEs in the credit crisis., 04/11/2011 14 Perception: Change in availability of bank loans in previous 6 months Improved Unchanged Deteriorated Total No. % No. % No. % No. % Austria 81 11.8 442 64.6 161 23.5 684 100 Belgium 120 16.8 460 64.4 134 18.8 714 100 Germany 228 12.4 1,455 62.5 586 25.2 2,329 100 Spain 310 11.1 1,438 51.5 1045 37.4 2,793 100 Finland 104 22.2 315 67.2 50 10.7 469 100 France 354 13.4 1,730 65.7 549 20.9 2633 100 Greece 75 9.9 352 46.4 332 43.7 759 100 Ireland 20 3.5 276 48.7 271 47.8 567 100 Italy 361 13 1,725 62 695 25 2,781 100 Netherlands 102 13.2 417 53.9 255 32.9 774 100 Portugal 89 12.3 405 56.2 227 31.5 721 100 Total 1,844 12.1 9,015 59.2 4,305 28.3 15,224 100 , , SMEs in the credit crisis., 04/11/2011 15 Experience: Results of loan applications in previous 6 months Not rejected Rejected Total Country No. % No. % No. % Austria 206 80.2 51 19.8 257 100 Belgium 212 81.5 48 18.5 260 100 Germany 683 74.6 233 25.4 916 100 Spain 714 50.6 696 49.4 1,410 100 Finland 92 84.4 17 15.6 109 100 France 901 81.4 206 18.6 1,107 100 Greece 169 47.7 185 52.3 354 100 Ireland 54 44.3 68 55.7 122 100 Italy 896 67.8 426 32.2 1,322 100 Netherlands 89 53.6 77 46.4 166 100 Portugal 173 61.8 107 38.2 280 100 Total 4,189 66.5 2,114 33.5 6,303 100 , , SMEs in the credit crisis., 04/11/2011 16 Terms and conditions: Change in bank interest rates in previous 6 months Increased Unchanged Decreased Total No.
Load more

Recommended publications
  • The Federal Reserve System: History and Structure
    Printed Page 253 [Notes/Highlighting] The Federal Reserve System: History and Structure The history of the Federal Reserve System The structure of the Federal Reserve System How the Federal Reserve has responded to major financial crises Module 26: The Federal Reserve System: H... Printed Page 253 The Federal Reserve System [Notes/Highlighting] Who’s in charge of ensuring that banks maintain enough reserves? Who decides how large the monetary base will be? The answer, in the United A central bank is an States, is an institution known as the Federal Reserve (or, informally, as institution that oversees and “the Fed”). The Federal Reserve is a central bank—an institution that regulates the banking system oversees and regulates the banking system, and controls the monetary and controls the monetary base. Other central banks include the Bank of England, the Bank of Japan, base. and the European Central Bank, or ECB. The Federal Reserve System Printed Page 253 An Overview of the Twenty-first Century [Notes/Highlighting] American Banking System Under normal circumstances, banking is a rather staid and unexciting business. Fortunately, bankers and their customers like it that way. However, there have been repeated episodes in which “sheer panic” would be the best description of banking conditions—the panic induced by a bank run and the specter of a collapse of a bank or multiple banks, leaving depositors penniless, bank shareholders wiped out, and borrowers unable to get credit. In this section, we’ll give an overview of the behavior and regulation of the American banking system over the last century.
    [Show full text]
  • An Indicator of Credit Crunch Using Italian Business Surveys
    Munich Personal RePEc Archive An Indicator of Credit Crunch using Italian Business Surveys Girardi, Alessandro and Ventura, Marco and Margani, Patrizia Parliamentary Budget Office, PBO, Rome, Italy, Italian National Institute of Statistics, ISTAT, Rome, Italy September 2018 Online at https://mpra.ub.uni-muenchen.de/88839/ MPRA Paper No. 88839, posted 14 Sep 2018 15:29 UTC An Indicator of Credit Crunch using Italian Business Surveys Alessandro Girardia,b, Patrizia Marganib, Marco Venturab a Parliamentary Budget Office, PBO, Rome, Italy b Italian National Institute of Statistics, ISTAT, Rome, Italy Abstract This paper presents a two-step procedure to derive a credit crunch indicator for the Italian manufacturing sector. Using qualitative firm-level data over the years 2008-2018, nonlinear discrete panel data techniques are first applied in order to identify the loan supply curve controlling for firm-specific observable characteristics. In the subsequent step, the variation of the estimated supply curve that cannot be explained by proxies for loan demand is interpreted as the degree of credit squeeze prevailing in the economy at a given point in time. The empirical evidence shows that credit crunch episodes are less likely to occur during periods of sustained economic growth, or when credit availability for the manufacturing sector is relatively abundant. In contrast, a tight monetary policy stance or a worsening of the quality of banking balance sheets tend to increase the likelihood of experiencing a credit squeeze. JEL: G30; G32; C23 Keywords: business survey, credit crunch, access to credit 1 1. Introduction During periods of financial distress, troubles affecting the credit system are likely to spread to the real sector, especially in countries where the banking sector is the most relevant financing channel to the business sector and/or the productive structure is predominantly based on small and medium enterprises (Ferrando et al., 2014; Berger and Udell, 2006).
    [Show full text]
  • Financial Catastrophe Research & Stress Test Scenarios
    Cambridge Judge Business School Centre for Risk Studies 7th Risk Summit Research Showcase Financial Catastrophe Research & Stress Test Scenarios Dr Andy Skelton Research Associate, Cambridge Centre for Risk Studies 20 June 2016 Cambridge, UK Financial Catastrophe Research 1. Catalogue of historical financial events 2. Development of stress test scenarios 3. Understanding contagion processes in financial networks (eg, interbank loans) - Network models & visualisations - Role of central banks in financial crises - Practitioner model – scoping exercise 2 Learning from History Financial systems and transaction technologies have changed But principles of credit cycles, human trust and financial interrelationships that trigger crises remain relevant 12 Historical Financial Crisis Crises occur periodically – Different causes and severities – Every 8 years on average – $0.5 Tn of lost annual economic output – 1% of global economic output Without FinCat global growth could be 4% a year instead of 3% Financial catastrophes are the single greatest economic risk for society – We need to understand them better 3 Historical Severities of Crashes – Past 200 Years US Stock Market Crashes UK Stock Market Crashes 1845 Railway Mania… 1845 Railway Mania… 1997 Asian Crisis 1997 Asian Crisis 1866 Collapse of Overend… 1866 Collapse of Overend… 1825 Latin American Crisis 1825 Latin American Crisis 1983 Latin American Debt… 1983 Latin American Debt… 1837 Cotton Crisis 1837 Cotton Crisis 1857 Railroad Mania… 1857 Railroad Mania… 1907 Knickerbocker 1907 Knickerbocker
    [Show full text]
  • Replacing Humpty Dumpty
    Replacing Humpty THE MAGAZINE OF INTERNATIONAL ECONOMIC POLICY 888 16th Street, N.W. Suite 740 Washington, D.C. 20006 Phone: 202-861-0791 Fax: 202-861-0790 Dumpty www.international-economy.com The new role of central bank credit targets. he Fed has a way other than open market operations to prevent economic crises— which is what it was set up to do long ago. We here present an alternative view of central bank power that has more to do with systemic effects, and with animal spirits as well. When the Fed was initially set up in 1913, in imitation of European George A. Akerlof is the central banks, direct lending by the Federal Reserve banks in Daniel E. Koshland Sr. Ttimes of crisis—in times of special need for liquidity—was Distinguished Professor thought to be its major tool. The Fed was supposed to be deal- of Economics at the ing with systemic effects—the contagion of failure from one University of California, business to another. Berkeley, and was Throughout the nineteenth century there were periodic awarded the 2001 Nobel banking panics. The depositors would literally line up in front Prize in Economics. of their bank, fearful that those ahead of them in line would be Robert J. Shiller is the Arthur M. Okun Professor the last to make their withdrawals and that the bank would then of Economics at Yale University. This article is be out of money. Such runs on banks were contagious. Word adapted from their book, that one bank had failed its obligations led depositors at other banks to line up as well.
    [Show full text]
  • The Great Moderation: Causes & Condition
    THE GREAT MODERATION: CAUSES & CONDITION WORKING PAPER SERIES Working Paper No. 101 March 2016 David Sutton Correspondence to: David Sutton Email: [email protected] Centre for Accounting, Governance and Taxation Research School of Accounting and Commercial Law Victoria University of Wellington PO Box 600, Wellington, NEW ZEALAND Tel: + 64 4 463 5078 Fax: + 64 4 463 5076 Website: http://www.victoria.ac.nz/sacl/cagtr/ Victoria University of Wellington P.O. Box 600, Wellington. PH: 463-5233 ext 8985 email: [email protected] The Great Moderation: Causes and conditions David Sutton The Great moderation: causes and conditions Abstract The period from 1984-2007 was marked by low and stable inflation, low output volatility, and growth above the prior historical trend across most of the developed world. This period has come to be known as the Great Moderation and has been the subject of much enquiry. Clearly, if it was the result of something we were ‘doing right’ it would be of interest to ensure we continued in the same vein. Equally, in 2011 the need to assess the causes of the Great Moderation, and its end with the Great Financial Crisis, remains. Macroeconomists have advanced a suite of potential causes of the Great Moderation, including: structural economic causes, the absence of external shocks that had been so prevalent in the 1970s, the effectiveness and competence of modern monetary policy, and (long) cyclical factors. To this point the enquiry has yielded only tentative and conflicting hypotheses about the ‘primary’ cause. This paper examines and analyses the competing hypotheses. The conclusions drawn from this analysis are that the Great Moderation was primarily the product of domestic and international financial liberalisation, with a supporting role for monetary policy.
    [Show full text]
  • The Return of Stagflation?
    University of Nebraska - Lincoln DigitalCommons@University of Nebraska - Lincoln Cornhusker Economics Agricultural Economics Department 4-16-2008 The Return of Stagflation? Jeffrey S. Royer University of Nebraska-Lincoln Follow this and additional works at: https://digitalcommons.unl.edu/agecon_cornhusker Part of the Agricultural and Resource Economics Commons Royer, Jeffrey S., "The Return of Stagflation?" (2008). Cornhusker Economics. 363. https://digitalcommons.unl.edu/agecon_cornhusker/363 This Article is brought to you for free and open access by the Agricultural Economics Department at DigitalCommons@University of Nebraska - Lincoln. It has been accepted for inclusion in Cornhusker Economics by an authorized administrator of DigitalCommons@University of Nebraska - Lincoln. C ORNHUSKER April 16, 2008 CONOMICS Institute of Agriculture & Natural Resources E Department of Agricultural Economics http://www.agecon.unl.edu/Cornhuskereconomics.html University of Nebraska–Lincoln Extension The Return of Stagflation? Within the past few months, there has been a Yr 4 Wks Market Report Ago Ago 4/11/08 substantial increase in the news media’s use of the term Livestock and Products, “stagflation” in reference to the future of the U.S. economy. Weekly Average Economists use stagflation to refer to a prolonged period Nebraska Slaughter Steers, characterized by both stagnation, represented by slow 35-65% Choice, Live Weight.. 98.33 89.78 88.31 economic growth and high unemployment, and inflation, Nebraska Feeder Steers, Med. & Large Frame, 550-600 lb.. 127.02 121.81 115.28 which is an increase in the general price level. Nebraska Feeder Steers, Med. & Large Frame 750-800 lb. 110.33 102.26 99.01 Stagflation was an important economic problem for Choice Boxed Beef, many countries during the 1970s.
    [Show full text]
  • The Impact of the Financial and Economic Crisis on Energy Investment
    INTERNATIONAL ENERGY AGENCY agence internationale de l’energie THE IMPACT OF THE FiNANCIAL AND ECONOMIC CRISIS ON GLOBAL ENERGY INVESTMENT © OECD/IEA, May 2009 International Energy Agency Note to Readers This report was prepared for the G8 Energy Ministerial in Rome on 24-25 May 2009 by the Office of the Chief Economist (OCE) of the International Energy Agency (IEA) in co-operation with other offices of the Agency. The study was directed by Dr. Fatih Birol, Chief Economist of the IEA. The work could not have been completed without the extensive data provided by many government bodies, international organisations, energy companies and financial institutions worldwide. The 2009 edition of the World Energy Outlook (WEO), to be released on 10 November, will include an update of this analysis and additional insights into the implications of the financial and economic crisis on energy security, climate change and energy poverty over the medium and longer- term. 2 The Impact of the Financial and Economic Crisis on Global Energy Investment – © OECD/IEA 2009 International Energy Agency EXECUTIVE SUMMARY Energy investment worldwide is plunging in the face of a tougher financing environment, weakening final demand for energy and falling cash flows – the result, primarily, of the global financial crisis and the worst recession since the Second World War. Reliable data on recent trends in capital spending and demand are still coming in, but there is clear evidence that energy investment in most regions and sectors will drop sharply in 2009. Preliminary data points to sharp falls in demand for energy, especially in the OECD, contributing to the recent sharp decline in the international prices of oil, natural gas and coal.
    [Show full text]
  • Is Our Current International Economic Environment Unusually Crisis Prone?
    Is Our Current International Economic Environment Unusually Crisis Prone? Michael Bordo and Barry Eichengreen1 August 1999 1. Introduction From popular accounts one would gain the impression that our current international economic environment is unusually crisis prone. The European of 1992-3, the Mexican crisis of 1994-5, the Asian crisis of 1997-8, and the other currency and banking crises that peppered the 1980s and 1990s dominate journalistic accounts of recent decades. This “crisis problem” is seen as perhaps the single most distinctive financial characteristic of our age. Is it? Even a cursory review of financial history reveals that the problem is not new. One classic reference, O.M.W. Sprague’s History of Crises Under the National Banking System (1910), while concerned with just one country, the United States, contains chapters on the crisis of 1873, the panic of 1884, the stringency of 1890, the crisis of 1893, and the crisis of 1907. One can ask (as does Schwartz 1986) whether it is appropriate to think of these episodes as crises — that is, whether they significantly disrupted the operation of the financial system and impaired the health of the nonfinancial economy — but precisely the same question can be asked of certain recent crises.2 In what follows we revisit this history with an eye toward establishing what is new and 1 Rutgers University and University of California at Berkeley, respectively. This paper is prepared for the Reserve Bank of Australia Conference on Private Capital Flows, Sydney, 9-10 August 1999. It builds on an earlier paper prepared for the Brookings Trade Policy Forum (Bordo, Eichengreen and Irwin 1999); we thank Doug Irwin for his collaboration and support.
    [Show full text]
  • Burning Money? Government Lending in a Credit Crunch Gabriel Jiménez José-Luis Peydró Rafael Repullo Jesús Saurina This Versión: March 2019 (August 2017)
    Burning Money? Government Lending in a Credit Crunch Gabriel Jiménez José-Luis Peydró Rafael Repullo Jesús Saurina This versión: March 2019 (August 2017) Barcelona GSE Working Paper Series Working Paper nº 984 Burning Money? Government Lending in a Credit Crunch Gabriel Jiménez José-Luis Peydró Rafael Repullo Jesús Saurina* Abstract We analyze a small, new credit facility of a Spanish state-owned bank during the crisis, using its continuous credit scoring system, its firm-level scores, and the credit register. Compared to privately-owned banks, the state-owned bank faces worse applicants, (softens) tightens its credit supply to (un)observed riskier firms, and has much higher defaults, especially driven by unobserved ex-ante borrower risk. In a regression discontinuity design, the supply of public credit causes: large positive real effects to financially-constrained firms (whose relationship banks reduced substantially credit supply); crowding-in of new private-bank credit; and positive spillovers to other firms. Private returns of the credit facility are negative, while social returns are positive. Overall, our results provide evidence on the existence of significant adverse selection problems in credit markets. JEL Codes: E44; G01; G21; G28. Keywords: adverse selection; state-owned banks; credit crunch; real effects of public credit; crowding-in. * This version is from March 2019. Gabriel Jiménez, Banco de España, email: [email protected]. José-Luis Peydró, ICREA-Universitat Pompeu Fabra, CREI, Barcelona GSE, Imperial College London, and CEPR, email: [email protected]. Rafael Repullo, CEMFI and CEPR, e-mail: [email protected]. Jesús Saurina, Banco de España, e-mail: [email protected].
    [Show full text]
  • Will the Credit Crunch Lead to Recession?
    CentrePieceISSN 1362-3761 The Magazine of The Centre for Economic Performance Volume 13 Issue 1 Spring 2008 Unemployment and welfare to work Nurses’ pay Voting on interest rates Britain’s new homes WILL THE CREDIT CRUNCH LEAD TO RECESSION? China’s entrepreneurs India’s foreign investment policy Management practices in China and India CentrePiece CentrePiece is the magazine of the CEP director, John Van Reenen Centre for Economic Performance at the CEP research director, Stephen Machin London School of Economics. Articles in this issue reflect the opinions of the authors, not Editor, Romesh Vaitilingam of the Centre. Requests for permission to Design, DesignRaphael Ltd reproduce the articles should be sent to the Illustration p4, John Minnion Editor at the address below. Print, Ghyllprint Ltd Editorial and Subscriptions Office © Centre for Economic Performance 2008 Centre for Economic Performance Volume 13 Issue 1 London School of Economics (ISSN 1362-3761) All rights reserved. Houghton Street London WC2A 2AE Annual subscriptions for one year (3 issues): Individuals £13.00 Students £8.00 Organisations (UK and Europe) £30.00 Rest of world £39.00 Visa and Mastercard accepted Cheques payable to London School of Economics Editorial Management gurus and the publishing into policy, practice and public CEP is hosting in early July. industry that sustains them often understanding. Elsewhere, we examine the often congratulate themselves on their In this issue of CentrePiece, we take perverse effects of regulation in Britain ‘thought leadership’, compiling endless a leaf out of the management crowd’s – the lethal impact of pay regulation in lists of ‘ultimate business thinkers’ and book with the launch of a series of healthcare; and how planning ‘most enduring ideas’.
    [Show full text]
  • The Central Role of Credit Crunches in Recent Financial History
    ALBERT M. WOJNILOWER The First Boston Corporation The Central Role of Credit Crunches in Recent Financial History THIS PAPER addresses, from an unusual perspective, some key aspects of the interactions between financial markets and the real economy in the United States over the past thirty years. The emphasis is on the upper cyclical turning points in general business. The theme is to show how the credit bottlenecks that accompanied and in fact triggered these turning points prompted the removal of the confining constraints and thereby shaped the cycles and inflation of the future. The vantage point is that of a trained economist who has spent nearly all this time in a ringside seat in the New York financial community-the first dozen years in the Federal Reserve Bank of New York and the remainder in commercial and invest- ment banking. Perhaps some of the observations offered in this paper may eventually be useful in a more formal setting. The key observation, controversial though it may be, is that the pro- pensity to spend (that is, the demand for nominal GNP) and therefore the demands for credit are inelastic (or at times even perversely positive) with respect to the general level of interest rates. The growth of credit is therefore essentially supply-determined-if not always, then at least at those times that are cyclically important; and if not at every level of rate, The author acknowledgesthe research assistance of ZwenyslavaA. Goy, Thomas C. Hier, and Elizabeth H. Willett and the help of members of the Brookings panel, which prompted a number of improvements in the paper.
    [Show full text]
  • Credit-Fuelled Bubbles
    FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Credit-Fuelled Bubbles Antonio Doblas-Madrid Michigan State University Kevin J. Lansing Federal Reserve Bank of San Francisco March 2016 Working Paper 2016-02 http://www.frbsf.org/economic-research/publications/working-papers/wp2016-02.pdf Suggested citation: Doblas-Madrid, Antonio, Kevin J. Lansing. 2016. “Credit-Fuelled Bubbles.” Federal Reserve Bank of San Francisco Working Paper 2016-02. http://www.frbsf.org/economic- research/publications/working-papers/wp2016-02.pdf The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. CREDIT-FUELLED BUBBLES Antonio Doblas-Madridy Kevin J. Lansing Michigan State University Federal Reserve Bank of San Francisco Abstract In the context of recent housing busts in the United States and other countries, many observers have highlighted the role of credit and speculation in fueling unsustainable booms that lead to crises. Motivated by these observations, we develop a model of credit-fuelled bubbles in which lenders accept risky assets as collateral. Booming prices allow lenders to extend more credit, in turn allowing investors to bid prices even higher. Eager to profit from the boom for as long as possible, asymmetrically informed investors fuel and ride bubbles, buying overvalued assets in hopes of reselling at a profit to a greater fool. Lucky investors sell the bubbly asset at peak prices to unlucky ones, who buy in hopes that the bubble will grow at least a bit longer.
    [Show full text]