Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007-9∗ Tobias Adrian Federal Reserve Bank of New York

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 contracts 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. ∗Paper for the 2012 AEA meeting in Chicago. We thank Daron Acemoglu, Olivier Blanchard and Michael Woodford for comments on an earlier version of the paper. We also thank Michael Roberts and Simon Gilchrist for making available data used in this paper.