Found 4 article(s) for author 'Credit Cycles'

Real Credit Cycles

Real Credit Cycles. Andrei Shleifer, July 2019, Paper, “Recent empirical work has revived the Minsky hypothesis of boom-bust credit cycles driven by fluctuations in investor optimism. To quantitatively assess this hypothesis, we incorporate diagnostic expectations into an otherwise standard business cycle model with heterogeneous firms and risky debt. Diagnostic expectations are a psychologically founded, forward-looking model of belief formation that captures over-reaction to news. We calibrate the diagnosticity parameter using micro data on the forecast errors of managers of listed firms in the US. The model generates countercyclical credit spreads and default rates, while the rational expectations version generates the opposite pattern. Diagnostic expectations also offer a good fit of three patterns that have been empirically documented: systematic reversals of credit spreads, systematic reversals of aggregate investment, and predictability of future bond returns. Crucially, diagnostic expectations also generate a strong fragility or sensitivity to small bad news after steady expansions. The rational expectations version of the model can account for the first pattern but not the others. Diagnostic expectations offer a parsimonious account of major credit cycles facts, underscoring the promise of realistic expectation formation for applied business cycle modeling.” Link

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Financial Repression in the European Sovereign Debt Crisis

Financial Repression in the European Sovereign Debt Crisis. Victoria Ivashina , April 25, 2014, Paper. “By the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice its 2007 level. We show that this type of increasing reliance on the domestic banking sector for absorbing government bonds generates a crowding out of corporate lending. For a given domestic firm, new debt is less likely to be a loan—i.e., the loan supply contracts—when local banks have purchased more domestic sovereign debt and when that debt is risky (as measured by CDS spreads)…” Link Verified October 11, 2014

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Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten

Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten. Carmen Reinhart, Kenneth Rogoff, December 24, 2013, Paper. “Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth…” Link verified June 19, 2014

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Cyclicality of Credit Supply: Firm Level Evidence

Cyclicality of Credit Supply: Firm Level Evidence. Victoria Ivashina, August 23, 2011, Paper. “Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time- series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms’ substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firm’s switching…” Link

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