financial frictions in macroeconomicslchrist/... · lenders scared of lending because of large...
TRANSCRIPT
![Page 1: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/1.jpg)
FinancialFrictionsinMacroeconomics
LawrenceJ.Christiano
NorthwesternUniversity
![Page 2: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/2.jpg)
BalanceSheet,FinancialSystem
Assets Liabilities
BankDebt
BankEquity
Bankloans
Securities,etc.
![Page 3: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/3.jpg)
BalanceSheet,FinancialSystem
Assets Liabilities
BankDebt
BankEquity
Bankloans
Securities,etc.
Frictionsbetween
financialinstitutionsand
theirlenders.
Sourceoffinancialcrisis,
bankruns,rollovercrises,
etc.
Macroprudentialpolicy
![Page 4: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/4.jpg)
BalanceSheet,FinancialSystem
Assets Liabilities
BankDebt
BankEquity
Bankloans
Securities,etc.
Financialfrictions
betweenbankersand
borrowers.
Perhapstheprimary
frictionin‘normaltimes’,when
macroprudentialisundercontrol.
![Page 5: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/5.jpg)
Outline
• Financialfrictionsfor‘normaltimes’• Assetsideofbankbalancesheets.
• Providesanaturalinterpretationofbusinesscycleswhen:• Weadoptaparticularmodeloffinancialfrictions(BGG)
• Incorporateaparticularshock(Riskshock).
• Financialfrictionsfor‘crisistimes’• Liabilitysideofbankbalancesheets.
• Theanalysisofmacroprudential policyquestions:• Whatleveragerestrictionsshouldbeplacedonbanks?
• Howshouldthoserestrictionsbevariedoverthebusinesscycle?
• Shouldyoubeeasyintoughtimesandtoughineasytimes?
• Sometoughpracticalissues.
![Page 6: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/6.jpg)
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
-4
-3
-2
-1
0
1
2
3
Cyclical Behavior of Interest Rate Spread
detrended BAA minus 10-year TreasuryHP filtered GDP
Interestratespread
strongly
countercyclical!
![Page 7: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/7.jpg)
Counter-cyclicalityofInterestRateSpread• Consistentwiththeideathatriseinriskinesshassomethingtodowithrecessions.
• Let’sseewherethisideatakesus…
• Bernanke-Gertler-Gilchrist(1999)proposeofwayofthinkingaboutaneconomyinwhichtheinterestratespreadreflectstheriskinessofindividualentrepreneurs(idiosyncraticrisk).
• Ofcourse,interestratespreadsreflectotherfactorstoo,likeliquiditypremia….
• AdoptatwistontheBGGModel:• theriskinessofentrepreneurscanvaryovertime.
• Putthiswholemechanisminafullyspecified,mediumsizedDSGEmodel,asinChristiano-Motto-Rostagno(AER2014)
• EstimateeverythingusingBayesianmethods.
![Page 8: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/8.jpg)
EconomicImpactofRiskShock
0.5 1 1.5 2 2.5 3 3.5 4
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
idiosyncratic shock
dens
ity
lognormal distribution: 20 percent jump in standard deviation
ss *1.2
Lendersscaredoflending
becauseoflargenumber
ofentrepreneursexpected
inlefttail.
Entrepreneurspayhigherspreadover
riskfreerate,andborrowless.
Entrepreneursinvestless;GDPfalls;
consumptionfallsbecauseofjob
losses;stockmarketfalls;inflation
falls:RECESSION!
![Page 9: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/9.jpg)
Istheredirectevidenceofgreatercross-sectionalriskinrecessions?
• Yes
• Cross-sectionalstandarddeviationofrateofreturnonequity.
• Non-financialfirmsinCenterForResearchinSecuritiesPrices(CRSP)database.
• Thosedatadoshowevidenceofcounter-cyclicality.
![Page 10: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/10.jpg)
Cross-sectionalstandarddeviationiscountercyclical
![Page 11: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/11.jpg)
HowMuchofUSBusinessCyclesCanweExplainwithRiskAlone?
• Asurprisinglylargeamount.
• Estimationdelivers:
• Estimatesoftheriskshock.
• Weask:
• WhatwouldthedatahavelookedlikeifONLYtheriskshockhadbeenactive?
![Page 12: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/12.jpg)
RoleoftheRiskShockinMacroandFinancialVariables
![Page 13: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/13.jpg)
WhyDoestheEconometricsliketheRiskShockSoMuch?
• Inpart:
• riskshockprovidesastraightforwardinterpretationofthecountercyclicalinterestratespread.
• Anotherreason:
• Theimpulseresponsefunctiontoacontractionaryriskshocklooksalotlikearecession.
![Page 14: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/14.jpg)
0 5 10 15
-0.5
-0.4
-0.3
-0.2
-0.1
0F: consumption
0 5 10 15
-1
-0.8
-0.6
-0.4
-0.2D: output
0 5 10 150
0.02
0.04
0.06
0.08
0.1I: risk, st
response to unanticipated risk shock, x0,0
response to anticipated risk shock, x8,0
0 5 10 150
10
20
30
40
50
A: interest rate spread (Annual Basis Points)
0 5 10 15
-3.5-3
-2.5-2
-1.5-1
C: investment
0 5 10 15-4
-3
-2
-1
B: credit
0 5 10 15
-5-4-3-2-10
E: net worth
0 5 10 15-0.4
-0.3
-0.2
-0.1
0
G: inflation (APR)
Figure 3: Dynamic Responses to Unanticipated and Anticipated Components of Risk Shock
Lookslikeabusinesscycle
![Page 15: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/15.jpg)
What’sthemodelgoodfor?
• Canthinkabouthowmonetarypolicyshouldrespondtoanincreaseininterestratespreads(shouldcutrates).
• CanbeusedtounderstandwhyincludingcreditgrowthandthestockmarketinaTaylorrulemightbeagoodidea(see,Christiano,etal,JacksonHolepaper,2010).
• Openeconomyversioncanbeusedtothinkaboutfinancialdimensionofexchangeratedepreciation(seeMihaiCopaciuandCristianBulete,CentralBankofRomania).
• Depreciationmakesdomesticgoodscheaperandstimulatesoutput.
• Depreciationimposescapitallossesonunhedgedborrowersinforeigncurrency,causingthemtocutbackspendingandreducingoutput.
![Page 16: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/16.jpg)
Financialfrictionsonliabilitysideofbankbalancesheets
• ThisislocationofthefinancialproblemsintheUSfinancialcrisis.
• Macroprudentialpolicyisaboutpreventingthoseproblemsfromhappeningagain.
• But,musthaveaclearideaofwhatthoseproblemswere!
• BeginwithalittlebackgroundontheoriginsofthecrisisandGreatRecession.
![Page 17: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/17.jpg)
Background
• AllstoriesaboutthethefinancialcrisisandGreatRecessionbeginwiththehousingboom.
• BoomwasfueledbyafloodofmoneypouringintotheUSviatheUScurrentaccountdeficit.
![Page 18: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/18.jpg)
Americanshavebeenabsorbingmoregoodsthantheyproduceformanyyears.
![Page 19: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/19.jpg)
CurrentAccountDeficit
• GDP(Y)accountingidentity:
• Tradesurplus(deficit,ifnegative)is:
• Negativecurrentaccountis(approximately)X– M<0.
• So,currentaccountdeficitisasituationwhenAmericansabsorbmoregoods(C+I+G) thantheyproduce,Y.
• Whatcomponentofconsumptionwastheculprit?
Y=C+I+G+X- M
Y- C- I- G=X- M
![Page 20: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/20.jpg)
ThefallinthecurrentaccountisfullyaccountedforbyariseinC
![Page 21: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/21.jpg)
TwoHypothesesAboutCauseofCapitalInflows
• Hypothesis#1:Americanswentonaconsumptionbinge.
• Weexpecttoseerealinterestratesrise.
• Hypothesis#2:ForeignersdevelopedanappetiteforUSfinancialassets(Bernanke’s‘SavingsGlutHypothesis’)
• Narrativefor#2:• foreignbuyingofUSfinancialassetsleadstoappreciationofdollar(hence,tradedeficit).
• Thisisthe‘overvalueddollar’,theChinese‘currencymanipulation’everyonecomplainedsomuchabout.
• GeneralbuyingofUSassetsleadstoastockmarketboom,makingAmericansfeelricher,soconsumptionrises.
• Weexpecttoseerealinterestratesfall.
![Page 22: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/22.jpg)
Hypothesis#2Wins
![Page 23: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/23.jpg)
WhydidSoMuchMoneyGoIntoHousing?
• AlthoughUScurrentaccountdeficitwithEuropenearlybalanced,grossflowsarehuge.
• MoneyflowedtoEuropeandthenflowedbackagain.
• EuropeaninstitutionsineffectpartofUSbankingsystem.
• HyunShincallsthisthe‘BankingGlut’, (Shin,HyunSong.2012.“GlobalBankingGlutandLoanRiskPremium.”IMFEconomicReview,60(2),155–192)
![Page 24: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/24.jpg)
From:Justiniano,Primiceri,Tambalotti,‘CreditSupplyandtheHousingBoom’
IncreaseSupplyofFundstoHousingDroveDown
Mortgagerates(ConsistentwithHypothesis#2.)
![Page 25: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/25.jpg)
Source:Justiniano,Primiceri andTambalotti (2015),“TheEffectsoftheSavingandBankingGlutontheUSEconomy”.
ConsistentwithideathathousingpurchasesbeingfundedbyInflowofforeigncapitalcorrespondingtocurrentaccountdeficit.
Houseprices
Currentaccount
![Page 26: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/26.jpg)
Ok,SoThat’stheBackground
• Whathappenednext?
![Page 27: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/27.jpg)
Trigger:housepricesstoppedrisinginMay2006
Wouldnothavefallensomuchif
therehadnotbeenabankrun.
![Page 28: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/28.jpg)
Whatturnedthehousingpricecorrectionintoadisaster?
• Initialviewbymanypeople:
![Page 29: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/29.jpg)
BigShortView• Lowlendingstandardsmadeeconomyahouseofcards.
• Whenthesystemcameunderpressure,itcrumbled:• defaults&foreclosures
• housepricedrops
• moredefaults&foreclosures
• collapseindemandduetonegativewealtheffect(zerolowerboundkickedin).
• GreatRecession.
• Viewhasbeenchallengedinseveraldetailedstudiesofmortgages(Albanesi,DeGiorgiandNosal,2016,‘CreditGrowthandtheFinancialCrisis:ANewNarrative’)
• Creditgrowthduringboomanddefaultsduringthecrisisconcentratedatmid/topofcreditscoredistributionforalldebtcategories.
![Page 30: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/30.jpg)
EmergingConventionalView:BankRun
• GaryGorton:• MisunderstandingFinancialCrises:WhyWeDon'tSeeThemComing,OxfordUniversityPress
• SlappedbytheInvisibleHand:ThePanicof2007,OxfordUniversityPress,2010.
• BenBernanke:TestimonybeforeCongressional‘FinancialInquiryCommission’,WashingtonD.C.,September2,2010.
• Nobodysawitcomingbecauseitwasarunonabankingsystemwedidn’tknowwassobigandsovulnerabletoruns.
![Page 31: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/31.jpg)
Whydiditlastsolong?
• Ascredittohousingsectordriedup(withcollapseofshadowbankingsystem),housingpricesfellsharply.
• Fallinhousingpricesmadehomeownersfeelpoor,andcutbackspending.
• Firmsseeingfewersales,cutbackinvestment.
• Economyinatailspin.
• Fedcouldn’tsaveitbyusualcutinR becauseR hitlowerbound.
• Perfectstorm:
• Bankrunoccurred,whenrateswerealreadylow.
• Fedoutofammunition.
![Page 32: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/32.jpg)
Thisiswhatabankrunlookedlikeinthe19th century:Diamond-Dybvig run.
Bankrunsin2007and2008weredifferentanddidnotlooklikethisatall(Gorton)!
Itwasarollovercrisisinashadow(invisibletonormalpeople)bankingsystem.
![Page 33: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/33.jpg)
Rollovercrisis• Considerthefollowingbank:
• Thisbankis‘solvent’:atcurrentmarketpricescouldpayoffallliabilities.
• Supposethatthebank’sassetsarelongtermmortgagebackedsecuritiesandtheliabilitiesareshortterm(sixmonth)commercialpaper.
• Thebankreliesonbeingabletorolloveritsliabilitieseveryperiod.• Normally,thisisnotaproblem.
Assets Liabilities120 Deposits: 100
Banker net worth 20
![Page 34: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/34.jpg)
Rollovercrisis
• Nowsupposethebankcannotrolloveritsliabilities.
• Inthiscase,thebankwouldhavetosellitsassets.
• Ifonlyonebankhadtodothis:noproblem,sincethebankissolvent.
• But,supposeallbanksfacearolloverproblem.
• Nowtheremaybeabig problem!
• Inthiscase,assetsmustbesoldtoanotherpartofthefinancialsystem,apartthatmayhavenoexperiencewiththeassets(mortgagebackedsecurities).
![Page 35: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/35.jpg)
TheDramaofaRollOverCrisisBroughttoLifeinSomeGreatMovies!
![Page 36: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/36.jpg)
Rollovercrisis
• Arollovercrisis:whenallbanksinanindustry(e.g.,mortgagebackedsecuritiesindustry)areunabletorollovertheirliabilities.
• Theonlybuyersofthesecuritieshavenoexperiencewiththem,sotheywon’tbuywithoutapricecut(firesale).
• Interestingly,thebuyersofthesecuritieswillallcomplainathowcomplex theyareandhownon-transparent theyare.
• But,therealproblemisthatbuyersinafiresalearesimplyinexperienced.
• TherollovercrisishypothesiscontrastswiththeBigShorthypothesis:assetswerefundamentallybad (Mian andSufi).
![Page 37: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/37.jpg)
Rollovercrisis
• Whenthewholeindustryhastosell,thenbankbalancesheetscouldsuddenlylooklikethis:
• Multipleequilibrium:balancesheetcouldbetheabove,withrun,orthefollowing,withnorun:
• Aruncouldhappen,ornot.
• Thisisexactlythesortoffinancialfragilitythatregulatorswanttoavoid!
• Underrollovercrisishypothesis,thiswasthesituationinsummer2007.
Assets Liabilities90 Deposits: 100
Banker net worth -10
Assets Liabilities120 Deposits: 100
Banker net worth 20
Firesalevalueofassets:
![Page 38: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/38.jpg)
RolloverCrisis:RoleofHousingMarket
• Whatmattersistheactualvalueofassetsandtheirfiresale value.
• Ifbankissolventunder(firesale value),thenprobabilityofruniszero.
• RolloverCrisisHypothesis:• pre-2005,nocrisispossible,
• post-2005crisispossible.
Pre-housing market correction Post-housing market correction
Assets Liabilities120 (105) Deposits: 100
Banker net worth 20 (5)
Assets Liabilities110 (95) Deposits: 100
Banker net worth 10 (-5)
![Page 39: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/39.jpg)
Howtothinkaboutregulationwhentheriskisofarollovercrisis.
• Onepossibility:modeltherollovercrisisdirectly.
• Bestmodelofrollovercrisisatthistime:Gertler-Kiyotaki (AER2015).
• TheyadapttherollovercrisismodelofsovereigndebtcreatedbyCole-Kehoe(JIE1996).
• Cole-KehoerelatedtoDiamond-Dybvig.
![Page 40: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/40.jpg)
Run,
s=1
s=2
s=3
s=4
…
Steady
state
s=T+2≈∞
Possible states: s=1, 2, 3,…, T+2.Bank run, s=1. Nobank runins>1.Ineachno-runstate there isachance
ofaruninthe next state, unless
s=2.
Runstate
s=1.
![Page 41: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/41.jpg)
100 200 300 400
0.98
0.97
0.96
0.95
0.94
0.93
0.92
0.91
Price of Capital, Q
100 200 300 4000
0.01
0.02
0.03
0.04
Probability of a bank run in t+1, p
100 200 300 4000
0.01
0.02
0.03
0.04
Bank net worth, N
OneHundredYearStochasticSimulation
100 200 300 400perc
ent d
evia
tion
from
ste
ady
stat
e
-6
-5
-4
-3
-2
-1
0GDP
![Page 42: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/42.jpg)
PolicyUseofModel
• Investigatetheimpactonfinancialstabilityofleveragerestrictions.
• Thisanalysisishard!
• Notclearhowyouintroducelotsofshocks,actualinvestment,openeconomy,currencymismatch,etc.
• Atadeeperlevel,computingequilibriumrequiresknowingwhathappensinthecrisisstate.
• Seemsunlikelyotherthanforpedagogicpurposes.
• Alternative:assumethatgovernmentswillalwaysactaslenderoflastresort.
• Constructmodelsthatdonotallowrollovercrisis,butdocapturemoralhazardimplicationsofbailouts.
![Page 43: Financial Frictions in Macroeconomicslchrist/... · Lenders scared of lending because of large number of entrepreneurs expected ... •We expect to see real interest rates fall. Hypothesis](https://reader034.vdocuments.site/reader034/viewer/2022042412/5f2c8796c82a1e1b4c5ceb49/html5/thumbnails/43.jpg)
Conclusion
• I’vereviewedmodelsoffinancialfrictionsthatappearedinterestingbeforeandaftercrisis.
• Modelsoffrictionsontheassetsideoffinancialfirmsseemlikelytoalwaysbeimportantandinteresting.
• Discussedmodelingtheliabilitysideoffinancialfirmbalancesheets.• Difficulttradeoffs.
• Modelthingscorrectly,butthat’sperhapsintractable.
• Takefullgovernmentbailoutasexogenous(sonorolloverrisk),anddomacroprudentialpolicytomanagetheresultingmoralhazardproblems.