Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210765 
Year of Publication: 
2019
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2019-25
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We propose a macroeconomic model in which adverse selection in investment drives the amplification of macroeconomic fluctuations, in line with prominent roles played by the credit crunch and collapse of the asset-backed security market in the financial crisis. Endogenous lending standards emerge due to an informational asymmetry between borrowers and lenders about the riskiness of borrowers. By using loan approval probability as a screening device, banks ration credit following financial disturbances, generating large endogenous movements in total factor productivity, explaining why productivity often falls during crises. Furthermore, the mechanism implies that financial instability is heightened when interest rates are low.
Subjects: 
Credit and credit aggregates
Business fluctuations and cycles
Interest rates
Financial stability
Financial markets
Productivity
JEL: 
E22
E32
E44
G01
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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