Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007 to 2009

Tobias Adrian, Paolo Colla, Hyun Song Shin

Chapter in NBER book NBER Macroeconomics Annual 2012, Volume 27 (2013), Daron Acemoglu, Jonathan Parker, and Michael Woodford, editors (p. 159 - 214)
Conference held April 20-21, 2012
Published in May 2013 by University of Chicago Press
© 2013 by the National Bureau of Economic Research
in NBER Book Series NBER Macroeconomics Annual

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.

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This paper was revised on June 1, 2012

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Document Object Identifier (DOI): 10.1086/669176

This chapter first appeared as NBER working paper w18335, Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-9, Tobias Adrian, Paolo Colla, Hyun Song Shin
Commentary on this chapter:
  Comment, Mark Gertler
  Comment, Arvind Krishnamurthy
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