Banking, macro-finance, political economy
MPhil in Economics, Tinbergen Institute (2016)
BSc Finance 2 tutorials at University of Amsterdam
Central Banking tutorials at Tinbergen Institute
Institutions and Financial Structure tutorials at Tinbergen Institute
Many credit cycles appear to end in crises. While deliberate risk taking seems a plausible explanation, firms and investors do not appear to properly anticipate increasing risk over time. We analyze why assessing the quality of a credit expansion may be difficult. Critically, we show that bank funding supply shocks alter risk incentives even when correlated with productivity. The effect is a distortion of price and quantity signals, disturbing a rational inference by firms. We argue that large funding shocks induce large lenders to shift to speculative assets at the cost of productive lending. As higher asset prices are correlated with high real productivity, supply shocks may induce firms and other banks to misjudge profitability and credit risk, reinforcing the expansion. We show that if inference is based on prices alone, agents form imprecise estimates. To correctly assess the underlying productivity and fragility, precise measure of both asset prices and credit quantity are needed.