Financial stress and the business cycle

Thesis: In this thesis, I investigate the implications of financial stress for economic fluctuations along several dimensions. What is it that makes financial crisis so disruptive? What is the role of the banking system in their propagation? How to identify and forecast financial distress? Each chapter brings new elements to complement the literature on these broad questions. In the first chapter of this thesis, written together with Yvan Bécard, we estimate a general equilibrium model where banks can adjust their lending standards for households and firms depending on their ability to liquidate the collateral of their borrowers. We find that collateral shocks, shocks that modify the liquidity of banks’ collateral, explain most of the US business cycle fluctuations for investment, consumption, loan volumes, and the credit spreads. In addition, the collateral shocks resemble measures of bank lending standard as observed over the past 30 years for households and firms. In the second chapter, I develop a model where the banking system is characterized by monopolistic competition and used to study the role of bank competition in the propagation of financial crises. I find that low competition in the banking system can dampen the impact of financial stress in situations where monetary policy is impeded by the ZLB. In the last chapter, I study the evolution of firm debt choices in response to different types of aggregate shocks. I find that only financial shocks imply opposite movements in bond and loan volumes. I use this result with sign-restriction methods to identify financial shocks in a VAR model. I find that financial shocks identified with bond and loan series explain a large share of the business cycle and especially the two last recessions. I also use the identification strategy to recover a measure of financial stress. This measure allows predicting the evolution of corporate bond spreads.

Author(s)

David Gauthier

Date of publication
  • 2019
Keywords
  • Financial stress
  • Banks
  • Business cycles
  • Shock identification
  • Estimation
Issuing body(s)
  • Université Panthéon-Sorbonne – Paris I
Date of defense
  • 05/11/2019
Thesis director(s)
  • Antoine d’ Autume
Version
  • 1