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Credit crunches from occasionally binding bank borrowing constraints

Holden, Tom D., Levine, Paul and Swarbrick, Jonathan M. (2019) Credit crunches from occasionally binding bank borrowing constraints Journal of Money, Credit and Banking.

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We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints, and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the counter-cyclical, positively skewed equity issuance that are characteristic of the credit crunches observed in the data.

Item Type: Article
Divisions : Faculty of Arts and Social Sciences > School of Economics
Authors :
Holden, Tom
Swarbrick, Jonathan
Date : 13 January 2019
Funders : Economic and Social Research Council (ESRC)
DOI : 10.1111/jmcb.12601
Copyright Disclaimer : © 2019 The Authors. Journal of Money, Credit and Banking published by Wiley Periodicals, Inc. on behalf of Ohio State University This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
Uncontrolled Keywords : Occasionally binding constraints; Credit crunches; Financial crises; Spreads; Dividends; Equity; Banking
Related URLs :
Depositing User : Clive Harris
Date Deposited : 07 Dec 2018 12:17
Last Modified : 14 Mar 2019 11:03

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