Costas Azariadis, Leo Kaas, Yi Wen, 04 April 2015

A large literature in macroeconomics shows how credit market shocks can propagate through deterioration in the value of collateral. This column decomposes debt into secured and unsecured components and investigates their effects separately. While secured debt is acyclical, unsecured debt is confirmed to predict GDP movements in accordance with the standard financial accelerator mechanism.

Kaoru Hosono, Daisuke Miyakawa, 09 August 2014

In the wake of the Global Crisis, several central banks have adopted unconventional monetary policies. This column presents new evidence from Japan on the transmission of monetary policy through banks’ balance sheets. Overall, the evidence suggests that bank net worth affects loan supply, that the effect depends on monetary policy and economic growth, and that this bank balance sheet channel has a significant impact on firms’ financing and investment. Exiting from unconventional monetary policies when bank balance sheets are weak could thus have a severe adverse impact on investment.

Alberto Martin, Jaume Ventura, 05 July 2014

There is a widespread view among macroeconomists that fluctuations in collateral are an important driver of credit booms and busts. This column distinguishes between ‘fundamental’ collateral – backed by expectations of future profits – and ‘bubbly’ collateral – backed by expectations of future credit. Markets are generically unable to provide the optimal amount of bubbly collateral, which creates a natural role for stabilisation policies. A lender of last resort with the ability to tax and subsidise credit can design a ‘leaning against the wind’ policy that replicates the ‘optimal’ bubble allocation.

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