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Lender Expertise and Propagation of Credit Shocks Garey Ramey UC San Diego July 2009. Previous literature: “Constrained borrower” view. Wealth constrained agency. Stiglitz and Weiss (1981), Bernanke and Gertler (1989,1990), Kiyotaki and Moore (1997), H ölmstrom and Tirole (1997,1998). - PowerPoint PPT Presentation
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Lender Expertise and
Propagation of Credit Shocks
Garey RameyUC San Diego
July 2009
Previous literature: “Constrained borrower” view
Stiglitz and Weiss (1981), Bernanke and Gertler (1989,1990), Kiyotaki and Moore (1997), Hölmstrom and Tirole (1997,1998)
Wealth constrained agency
Previous literature: “Constrained borrower” view
Stiglitz and Weiss (1981), Bernanke and Gertler (1989,1990), Kiyotaki and Moore (1997), Hölmstrom and Tirole (1997,1998)
Injurious liquidation
Diamond and Dybvig (1983), Schleifer and Vishny (1992), Hölmstrom and Tirole (1997),
Wealth constrained agency
Previous literature: “Constrained borrower” view
Stiglitz and Weiss (1981), Bernanke and Gertler (1989,1990), Kiyotaki and Moore (1997), Hölmstrom and Tirole (1997,1998)
Injurious liquidation
Diamond and Dybvig (1983), Schleifer and Vishny (1992), Hölmstrom and Tirole (1997),
Wealth constrained agency
Key idea: Shocks propagate by affecting borrower collateral
This paper: “Constrained lender” view
1. Specialized lenders channel saving to investment – “Brealey-Myers managers”
This paper: “Constrained lender” view
1. Specialized lenders channel saving to investment – “Brealey-Myers managers”
2. Lenders form long-term contractual relationships with projects, subject to agency costs
This paper: “Constrained lender” view
1. Specialized lenders channel saving to investment – “Brealey-Myers managers”
2. Lenders form long-term contractual relationships with projects, subject to agency costs
3. Averse shocks break up projects, lenders take time to find new projects
This paper: “Constrained lender” view
1. Specialized lenders channel saving to investment – “Brealey-Myers managers”
2. Lenders form long-term contractual relationships with projects, subject to agency costs
3. Averse shocks break up projects, lenders take time to find new projects
4. Household asset reallocation creates negative feedback
This paper: “Constrained lender” view
1. Specialized lenders channel saving to investment – “Brealey-Myers managers”
2. Lenders form long-term contractual relationships with projects, subject to agency costs
3. Averse shocks break up projects, lenders take time to find new projects
4. Household asset reallocation creates negative feedback
Den Haan, Ramey and Watson, “Liquidity Flows and Fragility of Business Enterprises,” JME, 2003
Results
1. Agency costs shocks propagated through lender-project relationships
Results
1. Agency costs shocks propagated through lender-project relationships
2. Household responses amplify propagation
Results
1. Agency costs shocks propagated through lender-project relationships
2. Household responses amplify propagation
3. Propagation is greater when shocks are more persistent
Results
1. Agency costs shocks propagated through lender-project relationships
2. Household responses amplify propagation
3. Propagation is greater when shocks are more persistent
4. Asset market feedbacks shocks propagate across sectors
Broader contribution:
New approach to modeling saving and investment
Broader contribution:
New approach to modeling saving and investment
Traditional model: Capital = accumulated output
Broader contribution:
New approach to modeling saving and investment
Traditional model: Capital = accumulated output
Lender expertise model: Capital = accumulated managerial knowledge
Model
• Unit mass of households
• Unit mass of specialized lenders
• Periods t = 1,2,3,…
Model
• Unit mass of households
• Unit mass of specialized lenders
• Periods t = 1,2,3,…
• In each period, a lender is either matched with a project or searching for a new project
tnt periodin produce that projects ofnumber
Model
• Unit mass of households
• Unit mass of specialized lenders
• Periods t = 1,2,3,…
• In each period, a lender is either matched with a project or searching for a new project
tnt periodin produce that projects ofnumber
ianz ittt project ofoutput 1
itit aaG offunction on distributi )(
lueproject va )( itt aV
lender unmatched of valuetU
Project surplus
lueproject va )( itt aV
lender unmatched of valuetU
Project surplus
tittitt U(aVaS ) surplusproject )(
lueproject va )( itt aV
lender unmatched of valuetU
yprobabilit eobsolesenc exogenous
Project surplus
tittitt U(aVaS ) surplusproject )(
}0,])'()'()1[(max{0
1111
ttttittt UadGaSEanz
factordiscount stochastic 1 t
costagency x
surplusproject from extractedrent
Surplus must cover this cost or project is terminated – Ramey and Watson (1997,1999,2000)
Agency cost
costagency x
surplusproject from extractedrent
Surplus must cover this cost or project is terminated – Ramey and Watson (1997,1999,2000)
Agency cost
marginrmination project te tR
xRS tt )(
costagency cover tosurplus sufficient tit Ra
d terminateisproject surplus,nt insufficie tit Ra
Project search
lenders searching ofnumber 1 tt nv
yprobabilit findingproject }1,min{ tt Avp
Project search
lenders searching ofnumber 1 tt nv
yprobabilit findingproject }1,min{ tt Avp
0
111 ])'()'([ tttttt UadGaSpEU
Equilibrium conditions
1
)'()'( 1
tRt xadGRa
1111
1 )1(
tttttttt nzEpRnz
Equilibrium conditions
1
)'()'( 1
tRt xadGRa
1111
1 )1(
tttttttt nzEpRnz
))1))(((1( 11 ttttt vpnRGn
Equilibrium conditions
1
)'()'( 1
tRt xadGRa
tR
ttt adGanzy output aggregate )'('
1111
1 )1(
tttttttt nzEpRnz
))1))(((1( 11 ttttt vpnRGn
Asset market
functionutility household 10
1
0
t
tt cE
tt yc cost agency consumes Household
11
t
tt y
y
Asset market
functionutility household 10
1
0
t
tt cE
Driving process
11
tezz tt
tt yc cost agency consumes Household
11
t
tt y
y
Numerical example
2. ,0 lognormal, )( itaG
22. that sochosen AvA
8.,1,99.,02.,8.
Numerical example
2. ,0 lognormal, )( itaG
22. that sochosen AvA
8.,1,99.,02.,8.
07.)(,56.1,78.,72. RGynR
:statesteady 1x
Numerical example
2. ,0 lognormal, )( itaG
22. that sochosen AvA
8.,1,99.,02.,8.
02.)(,90.1,92.,0 RGynR
07.)(,56.1,78.,72. RGynR
:statesteady 1x
:statesteady 0x
Extensions
1. Lender effort
Extensions
1. Lender effort
2. Physical capital
Extensions
1. Lender effort
2. Physical capital
3. Long-term contracting, liquidity hoarding
Extensions
1. Lender effort
2. Physical capital
3. Long-term contracting, liquidity hoarding
4. Countercyclical policy – “bailouts”
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