Abstract
This study argues that increasing malinvestment in an economy raises the actual credit risk but not the calculated credit risk until the onset of a recession. To this end, I analyse the relationship between credit risk and malinvestment in Germany, Spain, and Italy using a credit risk indicator based on nonfinancial corporate bond yields and annual loan growth for nonfinancial corporations from January 2004 to November 2014 on a monthly basis. The study also analyses Italy using sectorial non-performing loans data since Italy was the most affected by malinvestment among the countries in question. As a result, this paper suggests that banks should include malinvestment as a subcomponent of credit risk and recognize that the actual credit risk is higher than the calculated credit risk during artificial booms. This recommendation also underscores that malinvestment should be analysed more empirically.
Highlights
Despite six years have passed since the 2008 global financial crisis, the crisis’s adverse effects continue to ail many countries
The European Central Bank (ECB) illustrates the effects of the monetary policy on economic growth through the monetary transmission mechanism, which is shaped by mainstream economics; its approach has been mainly based on the traditional Keynesian interest rate channel
This study argues that increasing malinvestment in an economy, via low interest rates and cheap credits, raises the actual credit risk but not the calculated credit risk until the economy hits a depression
Summary
Despite six years have passed since the 2008 global financial crisis, the crisis’s adverse effects continue to ail many countries. The crisis has affected some countries to a lesser degree and they have managed to grow We have seen such results within the euro area, despite its single currency and monetary policy; it has increasingly become an important area of research for economists. There is a growing literature on the importance of credit risk for monetary policy, especially after the 2008 global financial crisis (see Ciccarelli, Maddaloni and Peydro, 2010; Hempell and Kok Sørensen, 2010; Gilchrist and Egon, 2012; Gilchrist and Mojon, 2014). In the ABCT, artificially low interest rates are the trigger for cheap credit growth, and malinvestment is the transmission mechanism for cheap credits.
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