VGSF - WU Vienna - LC

Peter Kondor, London School of Economics

online via Microsoft Teams Live Events 11:00 - 12:15

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Peter Kon­dor from Lon­don School of Eco­nom­ics to present his re­search pa­per.
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Ra­tional Sen­ti­ments and Eco­nomic Cycles

We pro­pose a ra­tional model of en­do­gen­ous cycles gen­er­ated by the two-way in­ter­ac­tion between credit mar­ket sen­ti­ments and real out­comes. Sen­ti­ments are high when most lenders op­tim­ally choose lax lend­ing stand­ards. This leads to low in­terest rates and high out­put growth, but also to the de­teri­or­a­tion of fu­ture credit ap­plic­a­tion qual­ity. When the qual­ity is suf­fi­ciently low, lenders en­do­gen­ously switch to tight stand­ards, i.e. sen­ti­ments be­come low. This im­plies high credit spreads and low out­put, but a gradual im­prove­ment in the qual­ity of ap­plic­a­tions, which even­tu­ally trig­gers a shift back to lax lend­ing stand­ards and the cycle con­tin­ues. The equi­lib­rium cycle might fea­ture a long boom, a lengthy re­cov­ery, or a double-dip re­ces­sion. It is gen­er­ic­ally dif­fer­ent from the op­timal cycle as atom­istic lenders ignore their ef­fect on the com­pos­i­tion of the pool of bor­row­ers. Care­fully chosen mac­ro-­pruden­tial or coun­ter­-­cyc­lical mon­et­ary policy often im­proves the de­cent­ral­ized equi­lib­rium cycle.

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