Download Credit, Investments and the Macroeconomy: A Few Open Issues by Marco Mazzoli PDF

By Marco Mazzoli

This ebook relates the literatures of finance, commercial economics and funding to the theoretical framework of the "credit view." First, banks' judgements touching on their resources are noticeable as not less than as suitable as their judgements bearing on their liabilities. moment, securities and financial institution credits are hugely imperfect substitutes. The interactions among genuine and fiscal sectors are analyzed from the viewpoint of the commercial enterprise, in a version the place the funding and monetary judgements of the enterprise are taken concurrently.

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In Bernanke's (1983) paper it is shown that in the period 1930-3 almost half of the existing American banks failed, and the remaining suffered very relevant losses, while the stock market crisis of 'Black Friday' (which was the initial event of the crash) created an enormous increase in the debt burden of the firms. According to Bernanke, the banks' distress had an effect on real activity by suppressing thefinancialflowsfor some categories offirmsthat did not have direct access to spot financial markets and had to rely on financial intermediaries.

The main feature of these models, unlike the creditist models, is that they are based on some assumption of credit or equity rationing. The basic idea of this literature is that economic disturbances (generally modelled as stochastic shocks) may affect the net worth of the borrowers and cause, as a consequence, a countercyclical change in the risk premium included in the interest rate on borrowing. A similar mechanism had been earlier described by Minsky (1975, 1982, 1986), with a few relevant differences: thefirstone is that Minsky's financial instability is endogenous (and not associated with stochastic variables); the second is that Minsky makes an explicit distinction between the way risk affects the lender and the borrower ('lender' and 'borrower' risk in Minsky terminology).

An increase in the interest rate would Credit, financial markets and the macroeconomy 19 therefore worsen the quality of the loans' portfolio of the bank by discouraging the borrowers with safer investment projects. In an alternative explanation of credit rationing different from (but similar to) the adverse selection case, Stiglitz and Weiss (1981) assume that the banks choose the interest rate on loans to affect the actions of their borrowers rather than to affect the quality of the pool of borrowers.

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