Working Paper: NBER ID: w25277
Authors: Joo F. Gomes; Marco Grotteria; Jessica Wachter
Abstract: Large crises tend to follow rapid credit expansions. Causality, however, is far from obvious. We show how this pattern arises naturally when financial intermediaries optimally exploit economic rents that drive their franchise value. As this franchise value fluctuates over the business cycle, so too do the incentives to engage in risky lending. The model leads to novel insights on the effects of unconventional monetary policies in developed economies. We argue that bank lending might have responded less than expected to these interventions because they enhanced franchise value, inadvertently encouraging banks to pursue safer investments in low-risk government securities.
Keywords: Credit Expansions; Economic Crises; Banking Behavior; Franchise Value; Unconventional Monetary Policies
JEL Codes: G01; G18; G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| franchise value (G32) | banks' lending behavior (G21) |
| macroeconomic conditions (E66) | franchise value (G32) |
| macroeconomic conditions (E66) | banks' lending behavior (G21) |
| unconventional monetary policies (E49) | franchise value (G32) |
| franchise value (G32) | riskier lending (G21) |