Credit Misallocation Research Articles

Whatever It Takes: The Real Effects of Unconventional Monetary Policy

Launched in Summer 2012, the European Central Bank (ECB)'s Outright Monetary Transactions (OMT) program indirectly recapitalized European banks through its positive impact on periphery sovereign bonds. However, the stability reestablished in the banking sector did not fully translate into economic growth. We document zombie lending by banks that remained undercapitalized even post-OMT. In turn, firms receiving loans used these funds not to undertake real economic activity such as employment and investment but to build up cash reserves. Creditworthy firms in industries with a high zombie firm prevalence suffered significantly from this credit misallocation, which further slowed down the economic recovery.

Credit Misallocation During the European Financial Crisis

Credit Misallocation During the European Financial Crisis

Credit Misallocation During the European Financial Crisis

Credit Misallocation During the European Financial Crisis

Excess Liquidity and Credit Misallocation: Evidence from China

China's M2/GDP ratio keeps rising, although it is already in the highest tier throughout the world. In this paper, we investigate empirically this puzzle using different levels of data. We first provide a quantitative approach to estimate the degree of China's excess liquidity based on cross-country regression. Our results show that excess liquidity in China is over 50 percent of the liquidity implied by cross-country benchmark. Monetary expansion in fact hasn't led to severe inflation in recent decades, indicating that there must be some credit inefficiently utilized or even laid idle in the real economy. Using province-level evidence, we show that credit misallocaton between state-owned enterprises (SOEs) and private enterprises (PEs) within province may lead to local credit inefficiency, and hence generate regional excess liquidity. We further validate this channel using manufacturing firm-level data, and find that credit misallocation is deteriorated after the 4 Trillion Stimulus Plan in 2008, making the deleveraging in China's manufacturing sector more challenging.

Whatever it Takes: The Real Effects of Unconventional Monetary Policy

Launched in Summer 2012, the European Central Bank (ECB)'s Outright Monetary Transactions (OMT) program indirectly recapitalized European banks through its positive impact on periphery sovereign bonds. However, the stability reestablished in the banking sector did not fully translate into economic growth. We document zombie lending by banks that remained undercapitalized even post-OMT. In turn, firms receiving loans used these funds not to undertake real economic activity such as employment and investment but to build up cash reserves. Creditworthy firms in industries with a high zombie firm prevalence suffered significantly from this credit misallocation, which further slowed down the economic recovery.

SOE preference and credit misallocation: A model and some evidence from China

We endogenize credit misallocation by introducing the government’s preference. The local government determines the credit subsidy to SOEs after a trade-off between SOEs’ profits and local aggregate outputs. Credit misallocation is more severe in regions where SOE share is high.

Overborrowing and Balance of Payments Imbalances in a Monetary Union

AbstractThe sources of the balance of payments imbalances in the Euro area can be characterized by a combination of four phenomena: (i) the credit imbalances between the core and the periphery of the Economic and Monetary Union (EMU) (ii) the credit misallocation between the tradable and the nontradable sectors in the periphery (iii) the rapid increase in the output and the price of nontradable goods in the periphery since the beginning of the EMU and (iv) the current account imbalances within the EMU. This paper explains all four of these stylized facts within a single model as a result of the interaction between the common monetary policy, inflation heterogeneity and a relaxation of the credit constraint in the nontradable sector of the periphery. When nontradable goods are used as collateral, an increase in their prices can initiate an overborrowing spiral and lead to a balance of payment imbalances. Furthermore, the model endogenizes differences in unit labor costs between the core and the periphery of the Euro area.

Endogenous Uncertainty and Credit Crunches

We develop a theory of endogenous uncertainty where the ability of investors to learn about firm-level fundamentals declines during financial crises. At the same time, higher uncertainty reinforces financial distress of firms, giving rise to “belief traps” — a persistent cycle of uncertainty, pessimistic expectations, and financial constraints, through which a temporary shortage of funds can develop into a long-lasting funding problem for firms. At the macro-level, belief traps provide a rationale for the long-lasting recessions that typically entail financial crises. In our model, financial crises are characterized by high levels of credit misallocation, an increased cross-sectional dispersion of growth rates, endogenously increased pessimism, uncertainty and disagreement among investors, highly volatile asset prices, and high risk premia. A calibration of our model to U.S. micro data on investor beliefs matches the slow recovery after the 08/09 crisis remarkably well.

Shadow Banking: China's Dual-Track Interest Rate Liberalization

Shadow banking in China is mainly conducted by banks to evade the excessive credit control, which constitutes a dual-track approach to liberalize the country's rigid interest rate policy. The market track of shadow banking can lead to efficiency gain by allowing credit resale to fund the more productive yet credit-deprived private enterprises (PEs). Pareto improvement can be achieved as the banks and state owned enterprises (SOEs) participate in shadow banking and share the efficiency gain. Full interest rate liberalization may not lead to additional efficiency gain, as it magnifies the credit mis-allocation in favor of the less productive SOEs.

Related Lending and Economic Performance: Evidence from Mexico

Related lending, a widespread practice in LDCs, is widely held to encourage bankers to loot their banks at the expense of minority shareholders and depositors. We argue that neither looting nor credit misallocation arenecessary outcomesof related lending. On the contrary, related lending often exists as a response to high information and contract-enforcement costs. Whether it encourages looting depends on other institutions, particularly those that create incentives to monitor directors. We examine Mexico's banking system, 1888–1913, in which there was widespread related lending. We find little evidence of credit misallocation, despite a financial crisis and government-organized rescue.