Working Paper: NBER ID: w18335
Authors: Tobias Adrian; Paolo Colla; Hyun Song Shin
Abstract: The financial crisis of 2007-9 has sparked keen interest in models of financial frictions and their impact on macro activity. Most models share the feature that borrowers suffer a contraction in the quantity of credit. However, the evidence suggests that although bank lending to firms declines during the crisis, bond financing actually increases to make up much of the gap. This paper reviews both aggregate and micro level data and highlights the shift in the composition of credit between loans and bonds. Motivated by the evidence, we formulate a model of direct and intermediated credit that captures the key stylized facts. In our model, the impact on real activity comes from the spike in risk premiums, rather than contraction in the total quantity of credit.
Keywords: financial frictions; macroeconomic activity; credit supply; bond financing
JEL Codes: E2; E5; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in bank lending (G21) | Increase in bond issuance (H74) |
| Shock in the supply of intermediated credit by banks (E51) | Substitution of bank loans with bond financing (G21) |
| Spike in risk premiums (G19) | Impact on real activity (F69) |
| Access to direct credit through bonds (G12) | Mitigation of negative impacts of reduced bank lending (F65) |