Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-9
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.
Paper presented at the NBER Macro Annual Conference, April 20-21, 2012. We thank Daron Acemoglu, Olivier Blanchard, Thomas Eisenbach, Mark Gertler, Simon Gilchrist, Arvind Krishnamurthy, Guido Lorenzoni, Jonathan Parker, Michael Woodford and participants at the Chicago Macroeconomic Fragility conference and the 2012 AEA meetings for comments on earlier versions of the paper. We also thank Michael Roberts and Simon Gilchrist for making available data used in this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research, the Federal Reserve Bank of New York, or the Federal Reserve System.
- During the recent crisis, bank lending to firms declined: loan issuances dropped 75 percent, and the probability of obtaining a loan fell...
Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007 to 2009, Tobias Adrian, Paolo Colla, Hyun Song Shin. in NBER Macroeconomics Annual 2012, Volume 27, Acemoglu, Parker, and Woodford. 2013