Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-9

56 Pages Posted: 1 Sep 2012

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Paolo Colla

Bocconi University - Department of Finance; Bocconi University - BAFFI Center on International Markets, Money, and Regulation

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: August 2012

Abstract

The financial crisis of 2007-9 has sparked keen interest in models of financial frictions and their impact on macro activity. Most models share the feature that borrowers suffer a contraction in the quantity of credit. However, the evidence suggests that although bank lending to firms declines during the crisis, bond financing actually increases to make up much of the gap. This paper reviews both aggregate and micro level data and highlights the shift in the composition of credit between loans and bonds. Motivated by the evidence, we formulate a model of direct and intermediated credit that captures the key stylized facts. In our model, the impact on real activity comes from the spike in risk premiums, rather than contraction in the total quantity of credit.

Suggested Citation

Adrian, Tobias and Colla, Paolo and Shin, Hyun Song, Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-9 (August 2012). NBER Working Paper No. w18335. Available at SSRN: https://ssrn.com/abstract=2139266

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.tobiasadrian.com

Paolo Colla

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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