Credit crunch in a model of financial intermediation and occupational choice |
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Authors: | Mingwei Yuan Christian Zimmermann |
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Institution: | aRisk Division of MBIA Insurance Corporation, 113 King Street, Armonk, NY 10504, USA;bDepartment of Economics, University of Connecticut and CIRPÉE, 341 Mansfield Road, Unit 1063, Storrs, CT 06269-1063, USA |
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Abstract: | In this paper, we introduce a dynamic general equilibrium model with numerous and heterogeneous investment projects and endogenous occupational choice to study a credit crunch. Asset accumulation of assets by households as they face various employment and return risks over a long lifetime determines whether they are entrepreneurs or workers. The origin of a credit crunch may be found in the conservative lending by banks during periods of financial duress and reduced profitability because of capital requirements. Using an example from Canada, monetary policy is shown to be largely ineffective in alleviating the credit crunch, while flexible loan regulation can erase it. |
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Keywords: | Credit crunch Basle Accord Heterogeneous agents Bank regulation Canada |
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