Working Papers
1. Bank Lending and Firm Dynamics in General Equilibrium, with Sabrina Studer
This paper models a dynamic lending relationship between banks and firms under asymmetric information in general equilibrium with endogenous firm entry. Banks and firms sign long-term lending contracts that specify the optimal levels of bank loans and repayments in each period depending on a firm’s productivity history. In equilibrium, interest rates, wage rates, and firm dynamics, such as growth rates and growth volatility over a firm’s lifespan are determined. Further, we extend the model to investigate the long-run effects of an exogenous credit contraction on firms. In a calibrated economy, we find that most of the negative effects are mitigated by an endogenous increase in the size of banks’ balance sheets. Nevertheless, firm entry contributes disproportionally to the effect on aggregate variables: More than half of the contraction in capital employment and almost all the decline in aggregate output and labor employment come from a decline in the firm entry. Besides, younger firms, which are also smaller on average, are much more adversely affected than older ones. The growth rate of young firms remains high though, as they operate at smaller sizes and banks increase the provision of loans more strongly when firms grow older.
2. Explaining Structural Change Towards and Within the Financial Sector, with Josef Falkinger and Sabrina Studer
This paper presents a 3x3 general equilibrium model with technological uncertainty, heterogeneous agents and quasi-homothetic preferences to analyze structural change between the real and the financial sector as well as within the financial sector. Besides the consumption and investment goods, two types of financial services are produced. The three factors of production are capital, skilled and unskilled labor. Financial services are needed to transform savings into future consumption possibilities. The financial market provides deposits and an incomplete set of securities. Payoffs of assets are determined by the future profitability of the technologies in which they are invested. We calibrate the model to the U.S. economy and show that technical progress (uniform or sector-biased) and an increase in household patience deliver the twofold structural change. Moreover, technical progress predicts a rise in income inequality consistent with the empirical literature and implies a reinforcement between structural change in the financial sector and household inequality.
This paper models a dynamic lending relationship between banks and firms under asymmetric information in general equilibrium with endogenous firm entry. Banks and firms sign long-term lending contracts that specify the optimal levels of bank loans and repayments in each period depending on a firm’s productivity history. In equilibrium, interest rates, wage rates, and firm dynamics, such as growth rates and growth volatility over a firm’s lifespan are determined. Further, we extend the model to investigate the long-run effects of an exogenous credit contraction on firms. In a calibrated economy, we find that most of the negative effects are mitigated by an endogenous increase in the size of banks’ balance sheets. Nevertheless, firm entry contributes disproportionally to the effect on aggregate variables: More than half of the contraction in capital employment and almost all the decline in aggregate output and labor employment come from a decline in the firm entry. Besides, younger firms, which are also smaller on average, are much more adversely affected than older ones. The growth rate of young firms remains high though, as they operate at smaller sizes and banks increase the provision of loans more strongly when firms grow older.
2. Explaining Structural Change Towards and Within the Financial Sector, with Josef Falkinger and Sabrina Studer
This paper presents a 3x3 general equilibrium model with technological uncertainty, heterogeneous agents and quasi-homothetic preferences to analyze structural change between the real and the financial sector as well as within the financial sector. Besides the consumption and investment goods, two types of financial services are produced. The three factors of production are capital, skilled and unskilled labor. Financial services are needed to transform savings into future consumption possibilities. The financial market provides deposits and an incomplete set of securities. Payoffs of assets are determined by the future profitability of the technologies in which they are invested. We calibrate the model to the U.S. economy and show that technical progress (uniform or sector-biased) and an increase in household patience deliver the twofold structural change. Moreover, technical progress predicts a rise in income inequality consistent with the empirical literature and implies a reinforcement between structural change in the financial sector and household inequality.
Work in Progress
1. The Missing Cohorts: Bank Soundness and Relationship Lending in Financial Crisis
In the paper, we develop a general equilibrium model to study how bank soundness affects their choice of transactional and relationship lending over the business cycles. Relationship lending relies on "soft" information which banks accumulate through repeated interactions with firms. Transactional lending, on the other hand, depends on "hard", quantitative and observable information, albeit subject to noise. The quality of soft information remains stable over business cycles, while hard information becomes less reliable during economic downturns. Depending on its soundness, a bank determines the optimal credit allocation to firms serviced under two lending techniques. Furthermore, we study the implications of banks' lending choices for the real economy during financial crises. Our model suggests that a decline in the average soundness of banks leads to less lending to incumbent transactional firms and delayed formation of new lending relationships. This constrains not only firms' immediate access to credit but also impacts future periods, as lending constraints typically ease within established lending relationships. Our findings provide insights into the slow economic recovery post-financial crises.
2. Interbank Networks and Aggregate Fluctuations
3. Interbank Lending and the Transmission of Monetary Policy
In the paper, we develop a general equilibrium model to study how bank soundness affects their choice of transactional and relationship lending over the business cycles. Relationship lending relies on "soft" information which banks accumulate through repeated interactions with firms. Transactional lending, on the other hand, depends on "hard", quantitative and observable information, albeit subject to noise. The quality of soft information remains stable over business cycles, while hard information becomes less reliable during economic downturns. Depending on its soundness, a bank determines the optimal credit allocation to firms serviced under two lending techniques. Furthermore, we study the implications of banks' lending choices for the real economy during financial crises. Our model suggests that a decline in the average soundness of banks leads to less lending to incumbent transactional firms and delayed formation of new lending relationships. This constrains not only firms' immediate access to credit but also impacts future periods, as lending constraints typically ease within established lending relationships. Our findings provide insights into the slow economic recovery post-financial crises.
2. Interbank Networks and Aggregate Fluctuations
3. Interbank Lending and the Transmission of Monetary Policy