Podcast
Questions and Answers
The real business cycle models take into account the role of financial intermediation.
The real business cycle models take into account the role of financial intermediation.
False
The credit channel of monetary policy is not related to the macroeconomic consequences of financial imperfections.
The credit channel of monetary policy is not related to the macroeconomic consequences of financial imperfections.
False
The Great Depression of 1929 did not provide any lessons for understanding the role of financial markets in the business cycle.
The Great Depression of 1929 did not provide any lessons for understanding the role of financial markets in the business cycle.
False
The credit view was developed before the contributions of Mishkin (1978) and Bernanke (1983).
The credit view was developed before the contributions of Mishkin (1978) and Bernanke (1983).
Signup and view all the answers
The 2007-2009 Great Financial Crisis was not preceded by any macroeconomic premises in the US.
The 2007-2009 Great Financial Crisis was not preceded by any macroeconomic premises in the US.
Signup and view all the answers
Financial development has a linear effect on long-run economic growth.
Financial development has a linear effect on long-run economic growth.
Signup and view all the answers
The Euro-area crisis is unrelated to the macroeconomic consequences of financial imperfections.
The Euro-area crisis is unrelated to the macroeconomic consequences of financial imperfections.
Signup and view all the answers
Cross-country and within-country analyses have not provided any conclusions about the impact of financial development on long-run economic growth.
Cross-country and within-country analyses have not provided any conclusions about the impact of financial development on long-run economic growth.
Signup and view all the answers
Empirical differences in financial development do not exist from an international perspective.
Empirical differences in financial development do not exist from an international perspective.
Signup and view all the answers
Financial intermediaries do not play a role in macroeconomic fluctuations or temporary deviations from long-run trend.
Financial intermediaries do not play a role in macroeconomic fluctuations or temporary deviations from long-run trend.
Signup and view all the answers
Study Notes
Financial Intermediation and Allocative Efficiency
- Financial intermediation plays a crucial role in allocating funds to projects with the highest marginal product of capital, leading to increased efficiency and economic growth.
- Two key ways financial intermediation achieves this:
- Collecting information to evaluate alternative investment projects through screening and monitoring of firms, and information production.
- Inducing individuals to invest in illiquid but more productive technologies by providing liquidity and risk sharing.
Financial Development and Saving Rate
- The impact of financial development on the saving rate is ambiguous, with two opposing effects:
- Negative effect: Higher levels of financial development induce less savings for precautionary reasons.
- Positive effect: More developed financial systems require less spread, leading to increased savings rate as interest rates on savings get closer to productivity.
Financial Development and Growth
- Establishing a statistical relation between financial development and growth rate: gi = α + βFDi + i
- β coefficient represents the change in growth rate for a 0.1 increase in financial development, with a 2.4% increase in growth rate.
- The sizes of the coefficients are economically large and statistically significant.
Causality in Economics
- Correlations between variables do not necessarily imply causality.
- Causality is important for policy makers to guide policy choices, but it is often difficult to establish.
- King and Levine (1993) showed that finance predicts growth, but did not address the issue of causality.
Financial Accelerator
- The financial accelerator framework suggests that economic disruptions may be generated or amplified by deteriorating credit-market conditions.
- Two necessary conditions:
- Financial markets are imperfect (information asymmetry between lenders and borrowers).
- The relationship between borrowers and savers is mediated by financial intermediaries that operate at some cost.
When Banks Matter
- With asymmetric information between lenders and borrowers, the firm can obtain only a collateralized loan.
- The value of a loan cannot exceed the value of assets, leading to an additional cost to the interest rates for an additional unit of credit.
- Shocks to the collateral value or level, shocks to the financial intermediation technology, or a monetary policy shock may all have real impacts on the borrowers' activity.
Financial Accelerator at Work
- The literature has distinguished two main channels of transmission through a financial accelerator mechanism:
- The balance sheet channel (shocks to qK).
- The bank lending channel (shocks to m).
- A key assumption for the financial accelerator theory to hold is the presence of financial frictions that prevent the switch from intermediated to direct lending.
Financial Structure and Growth
- Estimate the model: git = α + β1 Sit−1 + β2 Sit−1 xPit−1 + γXit−1 + Fi + Tt + it
- A positive/negative estimated β1 indicates that relatively larger market-based financing countries display higher/lower economic growth in normal times.
Financial Structure and Growth - Results in LP (2016)
- An increase in the bank-market ratio is associated with lower GDP growth in the subsequent five-year period.
- This effect is larger when interacted with housing market crises, but not with stock market crises.
Macroeconomic Consequences of Micro Financial Imperfections
- The Great Financial Crisis suggests that financial markets are not a veil, against the real business cycle view.
- Real business cycle models have been developed mainly disregarding the role of financial intermediation.
- The credit view developed starting from the contributions of Mishkin (1978) and Bernanke (1983).
- Financial intermediaries may have a role for macroeconomic fluctuations or temporary deviations from long-run trend.
Deciphering the 2007-2009 Great Financial Crisis (GFC)
- Macroeconomic considerations:
- Analyzing the premises to the US financial crisis.
- The credit view developed starting from the contributions of Mishkin (1978) and Bernanke (1983).
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Learn about the role of financial intermediation in allocating funds to projects with the highest marginal product of capital, including collecting information and providing liquidity-risk sharing.
