Business Cycles and Lending Standards∗
نویسندگان
چکیده
Aggregate productivity falls in recessions and rises in expansions. Several empirical studies suggest that the systematic behavior of lending standards, with laxer (tighter) standards applied during expansions (recessions), is responsible for reverting trends in aggregate productivity. We build a dynamic model that rationalizes these findings. Higher liquidity brought about by high levels of capital increases the early loan payments necessary for screening out unproductive entrepreneurs. Because the early payments hurt productive entrepreneurs by restricting their investment, competition among lenders results in contracts with no screening. Low productivity entrepreneurs enter production, causing a recession. The opposite happens for low capital levels.
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