<p>History typically does repeat with similar processes. Routes to both The Great Depression in 1929 and the Subprime Crisis (the Recession) 2007 are similar: central banks implemented lax monetary policy governments adopt populist policies expand credit, economic growth drives public private debt increase sharply asset illiquidity is caused due financial system's borrowing short-term fun...

This study is an empirical attempt to investigate the effects of balance sheet deterioration of Japanese firms and banks in the 1990s on credit allocation using the short-term economic survey of enterprises. This survey contains a unique item: proportion of firms perceiving the lending attitude as severe. After developing a theoretical model to link this item with the balance sheet conditions o...

We analyze the impact credit constraints have on how firms structure their dealings with their partners in the supply chain; and hence how imperfect capital markets can alter short run prices and long run investment levels. Credit constrained firms are shown to become endogenously risk averse and so seek to push some risk onto suppliers. Our predictions reflect risk sharing contracts in general...

There are two leading views on how financial crises turn into recessions. The first view highlights the importance of a troubled banking sector that cannot provide credit to domestic firms. The second view stresses the relevance of short-term borrowing in foreign currency and the associated decline in net worth through a weak balance sheet. Both views underline the role of financial constraints...

The current credit crunch and volatility in the financial markets is primarily blamed on two circumstances: some consumers’ misuse of mortgage credit and some mortgage lenders’ making credit available to borrowers who could hardly satisfy their credit obligations. This is an ideal time to reexamine the long-run experience concerning consumer’s use of both mortgage credit and non mortgage consum...

It is typically less profitable for an opportunistic borrower to divert inputs than to divert cash. Therefore, suppliers may lend more liberally than banks. This simple argument is at the core of our contract theoretic model of trade credit in competitive markets. The model implies that trade credit and bank credit can be either complements or substitutes. Among other things, the model explains...

We develop a general model of lending in the presence of endogenous borrowing constraints. Borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced. In the model, the dynamics of debt are closely linked with the dynamics of borrowing constraints. In fact, borrowing constraints must satisfy a dynamic consistency requirement: the value o...

We develop a general model of lending in the presence of endogenous borrowing constraints. Borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced. In the model, the dynamics of debt are closely linked with the dynamics of borrowing constraints. In fact, borrowing constraints must satisfy a dynamic consistency requirement: The value o...

Clearinghouses support financial trades by keeping records of transactions and by providing liquidity through short-term credit that is periodically cleared by participants. We study efficient clearing arrangements for formal exchanges, where traders must clear with a clearinghouse, and for over-the-counter (OTC) markets, where trades can be cleared bilaterally. When clearing is costly, we show...

This paper investigates whether information asymmetry affects corporate bond credit spreads. To gauge the extent of information asymmetry, we use decomposed equity institutional ownership based on the past investment and trading styles (Bushee(1998, 2001)). First, we detect that different institutional groups are associated with firms with varying degrees of information asymmetry. Moreover, we ...