Credit Multiplier Research Articles

Using Renewable Portfolio Standards to Accelerate Development of Negative Emissions Technologies

As society continues to emit greenhouse gases, the likelihood of dangerous climate change occurring increases. Indeed, most analyses project that we must utilize negative emission technologies (NETs) to avoid dangerous warming. Even the Paris Agreement anticipates the implementation of NETs. Unfortunately, NETs are not ready for large-scale deployment. In many instances, their technologies remain uncertain; in others, their ability to operate at the scale required is unknown. Other uncertainties, including their costs, effectiveness, and environmental impacts have yet to be determined. A means to accelerate the development and implementation of NETs is a policy that already did the same for renewable energy – Renewable Portfolio Standards (RPSs). RPSs require that providers source a predetermined amount of their electricity from renewable energy. RPSs have an established track record of stimulating investment in renewable energy in the United States and elsewhere. These policies incorporate a number of requirements that jurisdictions can tailor to accommodate local resources, industries, and objectives. Similarly, RPSs can facilitate the investment in and development of NETs. RPSs create markets for technologies that encourage compliance with low-cost alternatives. This incentivizes innovation, which lowers costs. Furthermore, jurisdictions can utilize other tools of RPSs, such as technology carve outs and credit multipliers, to encourage development of specific technologies. Using these provisions, states have incentivized the development and installation of renewable energy in general and solar power in particular. However, current RPSs are too limited to develop NETs. States need to expand the technologies that satisfy RPS mandates to include NETs, thereby fostering the development of NETs. Over time, states should also expand the economic sectors required to comply with their RPSs to encompass the agriculture, aviation, and manufacturing industries, sectors with emissions that are expensive or difficult to mitigate.

Credit and Fiscal Multipliers in China

We jointly estimate credit and fiscal multipliers in China. We use the tenure of the provincial party secretary, interacted with the type of stimulus used in other provinces, to obtain separate instruments for provincial credit and government expenditure. We estimate a fiscal multiplier of 0.8 and a credit multiplier of 0.2 in 2001-2015. The multipliers have changed over time. The fiscal multiplier has increased from 0.75 in 2001-2008 to 1.4 in 2010-2015. The credit multiplier has declined from 0.17 to zero over the same periods. Our results suggest that reducing credit growth in China is unlikely to disrupt output growth, whereas fiscal policy may be effective in supporting macroeconomic adjustment.

Peněžní a úvěrové multiplikátory ve vybraných ekonomikách

The latest financial crisis has led to significant changes in the central bank's monetary policies. They have tried to respond by expansionary monetary policy in the different forms. We analyze if commercial and other banks use a higher quantity of reserves in order to increase granting of loans into the economy. Analysis is focused on the tendencies in money and credit multipliers. There are four analysed economics during the period 2008-2014: Czech Republic, European Monetary Union, Great Britain and the USA. No surprise that multipliers had tendencies to decline, especially from high values in the Great Britain and the USA. Development was quite surprising in the EMU, where all multipliers were very stable. We have observed the biggest exceptions in the USA, and the Czech Republic, respectively. Money multiplier of M1 is still less than 1 in the USA. Czech Republic is specific according to the values of credit multiplier. They are lower than values of money multiplier of M2, and even lower than multiplier of M1 since 2012. The most likely reasons for all trends are presented in the article.

Fiscal Multipliers for Brazil

We find historical fiscal multipliers for Brazil around 0.5, larger than what existing literature typically identifies for the average emerging market. However, spending and public credit multipliers seem to have dropped to near zero since the global financial crisis, as the estimate for the whole sample period (1999-2014) is about ½ of that for precrisis years. By contrast, revenue multipliers have remained broadly stable. We conclude that fiscal consolidations based on expenditure and public credit retrenchment are likely to entail a modest drag on growth in the near term.

Fiscal Multipliers for Brazil

We find historical fiscal multipliers for Brazil around 0.5, larger than what existing literature typically identifies for the average emerging market. However, spending and public credit multipliers seem to have dropped to near zero since the global financial crisis, as the estimate for the whole sample period (1999-2014) is about 1/2 of that for pre crisis years. By contrast, revenue multipliers have remained broadly stable. We conclude that fiscal consolidations based on expenditure and public credit retrenchment are likely to entail a modest drag on growth in the near term.

The environmental and cost implications of solar energy preferences in Renewable Portfolio Standards

Many state-level Renewable Portfolio Standards (RPS) include preferences for solar generation, with goals of increasing the generation diversity, reducing solar costs, and encouraging local solar industries. Depending on their policy design, these preferences can impact the RPS program costs and emissions reduction. This study evaluates the impact of these policies on costs and emissions, coupling an economic dispatch model with optimized renewable site selection. Three policy designs of an increased RPS in Michigan are investigated: (1) 20% Solar Carve-Out, (2) 5% Distributed Generation Solar Carve-Out, and (3) 3× Solar Multiplier. The 20% Solar Carve-Out scenario was found to increase RPS costs 28%, while the 5% Distributed Generation Solar Carve-Out increased costs by 34%. Both of these solar preferences had minimal impact on total emissions. The 3× Solar Multiplier decreases total RPS program costs by 39%, but adds less than half of the total renewable generation of the other cases, significantly increasing emissions of CO2, NOx, and SO2 relative to an RPS without the solar credit multiplier. Sensitivity analysis of the installed cost of solar and the natural gas price finds small changes in the results of the Carve-Out cases, with a larger impact on the 3× Solar Multiplier.

Restrições financeiras e a decisão de investimento das firmas brasileiras

O estudo objetiva testar a relação entre restrições ao crédito e investimento das firmas brasileiras utilizando a estratégia delineada por Almeida e Campello (2007), a qual se mostra robusta às diversas críticas levantadas pela literatura. Os resultados encontrados sugerem que: 1) firmas classificadas como não restritas, em geral, comportam-se exatamente como prevê o modelo neoclássico; e 2) firmas classificadas como restritas comportam-se de maneira consistente com o modelo de Almeida e Campello (2007). Esses resultados diferem substancialmente daqueles evidenciados em estudos anteriores no Brasil e constituem uma evidência (original) da existência do efeito multiplicador de crédito no nível de firma.

Credit Multipliers as a Mechanism to Incentivize Low-Carbon Fuel Policy Adoption and to Reduce Fuel Shuffling

Low-carbon fuel policies such as the federal Renewable Fuel Standard (RFS) and California’s Low Carbon Fuel Standard (LCFS) encourage the use of low-carbon fuels through different incentive mechanisms. One outcome of these market-based designs is that incentives for fuel shuffling exist for low carbon intensity fuels. Fuel shuffling reduces policy efficiency and potentially increases greenhouse gas (GHG) emissions due to transport. One way to address this inefficiency is to differentiate a commodity through the use of certification (e.g. GHG emissions or sustainability standards). We argue that decoupling certificates from physical quantities of fuel will mitigate shuffling concerns, improve the economic efficiency of fuel regulation, and better incentivize technology innovation for fuels. Use of decoupled certificates may also circumvent concerns associated with the General Agreement of Tariffs and Trade regulation by the World Trade Organization. While this analysis indicates that certificate decoupling adds substantial value to low-carbon fuel policy, the policy may also be inefficient if decoupling incentivizes paper shuffling. We propose using credit multipliers in addition to certificate decoupling to overcome this problem. This approach may provide economic benefits of over $50 billion dollars for the trade of ethanol between the U.S. and Brazil alone.

The Good, the Bad, and the Ugly: An inquiry into the causes and nature of credit cycles

This paper builds models of nonlinear dynamics in the aggregate investment and borrower net worth and uses them to study the causes and nature of endogenous credit cycles. The basic model has two types of projects: the Good and the Bad. The Bad is highly productive, but, unlike the Good, it generates less aggregate demand spillovers and contributes little to improve borrower net worth. Furthermore, it is relatively difficult to finance externally due to the agency problem. With a low net worth, the agents cannot finance the Bad, and much of the credit goes to finance the Good, even when the Bad projects are more profitable than the Good projects. This over-investment to the Good creates a boom and generates high aggregate demand spillovers. This leads to an improvement in borrower net worth, which makes it possible for the agents to finance the Bad. This shift in the composition of the credit from the Good to the Bad at the peak of the boom causes a deterioration of net worth. The whole process repeats itself. Endogenous fluctuations occur, as the Good breeds the Bad, and the Bad destroys the Good. The model is then extended to add a third type of the projects, the Ugly, which are unproductive but easy to finance. With a low net worth, the Good competes with the Ugly, creating the credit multiplier effect; with a high net worth, the Good competes with the Bad, creating the credit reversal effect. By combining these two effects, this model generates intermittency phenomena, i.e., relatively long periods of small and persistent movements punctuated intermittently by seemingly random-looking behaviors. Along these cycles, the economy exhibits asymmetric fluctuations; it experiences a long and slow process of recovery from a recession, followed by a rapid expansion, and possibly after a period of high volatility, plunges into a recession.

Defining "Biomass": An Examination of State Renewable Energy Standards

This Article encourages state and federal policymakers to consider the sustainability of biomass when establishing or implementing standards that mandate or incentivize the use of biomass for energy, whether as fuel or electricity. Revealing the important role biomass plays in renewable energy standards, Section II introduces the concepts of biomass, renewable energy objectives, and sustainability. Section III surveys the various definitions of "biomass." The survey exposes widespread use of an inadequate definition of "biomass," primarily due to the policy oversight that renewable does not equal sustainable. Section IV provides a discussion of two solutions to remedy the problem of the deficient definition of "biomass." The first solution discussed is a model approach to be utilized by policymakers. The approach can be utilized when a state renews or revises RPS goals, when a state without a RPS enacts a RPS, or when an agency managing a program encounters an ambiguous, broad definition. The approach includes factors to consider when developing a definition of "biomass." One such consideration is sustainability certification. Environmental and energy objectives can be fused by the adoption of a certification program, such as sustainability certification based on standards and procedures developed by the Roundtable on Sustainable Biofuels ("RSB"). The approach also suggests utilizing Renewable Energy Credit ("REC") multipliers based on those meeting or exceeding sustainability goals. The second proposed solution encourages a national RPS, preferably non-preemptive. A national RPS will help develop nationwide standards while providing latitude for statespecific energy objectives. National policymakers should also consider utilizing the model approach. Alone or combined, these solutions help ensure that progressive energy policy does not negatively impact the environment.

The Firm-Level Credit Multiplier

We study the effect of asset tangibility on corporate financing and investment decisions. Financially constrained firms benefit the most from investing in tangible assets because those assets help relax constraints, allowing for further investment. Using a dynamic model, we characterize this effect - which we call firm-level credit multiplier - and show how asset tangibility increases the sensitivity of investment to Tobin’s Q for financially constrained firms. Examining a large sample of manufacturers over the 1971–2005 period as well as simulated data, we find support for our theory’s tangibility–investment channel. We further verify that our findings are driven by firms’ debt issuance activities. Consistent with our empirical identification strategy, the firm-level credit multiplier is absent from samples of financially unconstrained firms and samples of financially constrained firms with low spare debt capacity.

The firm-level credit multiplier

We study the effect of asset tangibility on corporate financing and investment decisions. Financially constrained firms benefit the most from investing in tangible assets because those assets help relax constraints, allowing for further investment. Using a dynamic model, we characterize this effect — which we call firm-level credit multiplier — and show how asset tangibility increases the sensitivity of investment to Tobin’s Q for financially constrained firms. Examining a large sample of manufacturers over the 1971–2005 period as well as simulated data, we find support for our theory’s tangibility–investment channel. We further verify that our findings are driven by firms’ debt issuance activities. Consistent with our empirical identification strategy, the firm-level credit multiplier is absent from samples of financially unconstrained firms and samples of financially constrained firms with low spare debt capacity.

International capital flows, debt overhang and volatility

This paper shows how international capital flows originate boom-bust and sunspot episodes in a neoclassical growth model of a small, open economy. A limit is imposed on how much the economy can borrow from foreign creditors and it is made endogenous by assuming that the debt-to-GDP ratio is procyclical. The steady state is locally indeterminate when the credit multiplier is larger than some threshold level, whereas saddle-point stability prevails when the credit multiplier is low enough. As a consequence, high levels of the credit multiplier lead to both booms followed by busts and sunspot-driven volatility near the steady state, while, in contrast, low levels ensure monotonic convergence. Compared with saddle-path equilibria, boom-bust and sunspot equilibria are associated with both lower welfare and debt overhang, that is, a crowding-out effect of credit: when the economy is highly leveraged, it uses savings to cut down foreign debt, at the expense of both human and physical investment. Numerical examples show that indeterminacy arises for debt-to-GDP ratios that fall within the range of available estimates. Finally, the effects of shocks to the world interest rate on output and consumption are amplified and persistent in the debt overhang regime.

Macroeconomic Effects of Unconventional Monetary Policy in the Euro Area

I find that the Eurosystem can stimulate the economy beyond the policy rate by increasing the size of its balance sheet or the monetary base, that is so-called quantitative easing. The transmission mechanism turns out to be different compared to traditional interest rate innovations: (i) whilst the effects on economic activity and consumer prices reach a peak after about one year for an interest rate innovation, this is more than six months later for a shift in the monetary base that is orthogonal to the policy rate (ii) interest rate spreads charged by banks decline persistently after quantitative easing policies, whereas the spreads increase significantly after a fall in the policy rate (iii) there is no significant short-run liquidity effect after an interest rate innovation, that is additional bank loans are generated by a greater credit multiplier. In contrast, the multiplier declines considerably after an expansion of the Eurosystem’s balance sheet. JEL-Code: C320, E300, E440, E510, E520.

Macroeconomic Effects of Unconventional Monetary Policy in the Euro Area

I find that the Eurosystem can stimulate the economy beyond the policy rate by increasing the size of its balance sheet or the monetary base, that is so-called quantitative easing. The transmission mechanism turns out to be different compared to traditional interest rate innovations: (i) whilst the effects on economic activity and consumer prices reach a peak after about one year for an interest rate innovation, this is more than six months later for a shift in the monetary base that is orthogonal to the policy rate (ii) interest rate spreads charged by banks decline persistently after quantitative easing policies, whereas the spreads increase significantly after a fall in the policy rate (iii) there is no significant short-run liquidity effect after an interest rate innovation, that is additional bank loans are generated by a greater credit multiplier. In contrast, the multiplier declines considerably after an expansion of the Eurosystem’s balance sheet.

On the allocation of credit and aggregate fluctuations

Recent literature on financial development and growth has highlighted the possibility of endogenous business cycles arising for particular levels of a given credit multiplier. These studies concentrate on loans directed to the productive activity and neglect the role of credit to consumption. In this paper, we consider an endogenous growth model, where a representative agent must choose how to allocate credit; basically, the agent considers a simple rule where the share of credit to consumption reacts to deviations of the consumption - wealth ratio relatively to the corresponding steady state level. The setup generates nonlinear dynamics, which are analyzed both locally and globally.

Basel II and the money supply process: some empirical evidence from the Greek banking system

The purpose of this article is to examine the Basel II influence on the money endogeneity process in the Greek banking system. The importance of equity, through Basel II directives, is initially discussed by creating and applying a ‘new credit (equity) multiplier’. Then a new multivariate loan model, which contains bank's equity as explanatory variable, is briefly presented and next tested. From the econometrics, it is obvious that although the equity multiplier is not operative, the loan model favours Structuralism regarding the Greek monetary system and its money supply process.

Constraints on credit, consumer behavior and the dynamics of wealth

This paper develops a simple macroeconomic model where the pattern of wealth accumulation is determined by a credit multiplier and the way households react to short-term fluctuations. Given this setup, long term wealth dynamics are eventually characterized by the presence of endogenous cycles.

The stability of the credit multiplier and the money demand function in 1930s Japan

The stability of the credit multiplier and the money demand function in 1930s Japan

Corporate Financing and Investment: The Firm-Level Dynamics of the Credit Multiplier

Corporate Financing and Investment: The Firm-Level Dynamics of the Credit Multiplier