Benjamin M. Friedman

Bio: Benjamin M. Friedman is an academic researcher. The author has contributed to research in topics: Debt-to-GDP ratio & Debt. The author has an hindex of 5, co-authored 6 publications receiving 2672 citations.

The Credit Crunch

Abstract: ACCORDING TO many popular accounts, the severity of the recession that began in July 1990 was worsened by financial distress-or, at least, by financial discomfort-in a number of sectors of the economy. Much of this discussion centered on the so-called "credit crunch" in the banking sector. ' As early as the spring of 1990, some months before the recession began, there were newspaper reports (mostly anecdotal) of banks cutting back on lending, sometimes with deleterious effects on retailers and other bank borrowers. In June the secretary of commerce called the credit crunch a serious problem,2 and congressional hearings on the issue were held during the summer. As the recession arrived in July and then deepened during the fall, the view that a credit crunch was playing at least some role in the downturn became increasingly widespread among policymakers, including some at the Federal Reserve. Despite these developments, there was, and still is, a notable lack of consensus about the importance of a credit crunch in the banking sector, its causes, and even the meaning of the term. Although it is too early to

The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been

Abstract: This paper summarizes and quantifies past changes in the U.S. commercial banking industry and forecasts what the future may hold. It emphasizes regulatory changes and technical and financial innovations as the central driving forces behind transformation of the industry. Changes in the regulatory environment include the deregulation of deposit accounts, several major changes in capital requirements, reductions in reserve requirements, expansion of bank powers, and liberalization of geographic restrictions on intrastate and interstate banking. Important technical innovations that have affected the banking industry include the advances in information processing and telecommunications technologies that facilitate the low-cost, rapid transfer of information and funds that fuel modern financial markets. Innovations in applied finance include those that have allowed the securitization of many traditional bank assets and have expanded the scope and volume of financial derivative activity. Many of these regulatory, technical and financial changes have altered the way in which banks compete with each other, and have brought about substantial external competition to U.S. banking organizations from foreign banks and from nonbank financial intermediaries. To document and assess the effects of these forces, the authors examine the evolution over time of the balance sheets, off-balance sheet activities, and income statements of all insured U.S. commercial banks from 1979 through 1994. The authors believe the most novel aspect of their analysis derives from the estimation of the patterns of bank lending to borrowers of different sizes over time. A key question they examine is how the well-known reduction in bank commercial and industrial lending of the early 1990s affected different sizes of borrowers. They estimate a 34.8 percent real contraction in loans to borrowers with bank credit of less than $1 million during the first half of the 1990s, a substantial decline in lending to (This abstract was borrowed from another version of this item.)

Inventory Investment, Internal-Finance Fluctuations, and the Business Cycle

Abstract: IT IS A well-known fact that inventory disinvestment can account for much of the movement in output during recessions. Almost one-half of the shortfall in output, averaged over the five interwar business cycles, can be accounted for by inventory disinvestment, and the proportion has been even larger for postwar recessions.' A lesser-known fact is that corporate profits, and therefore internal-finance flows, are also extremely procyclical and tend to lead the cycle. Wesley Mitchell finds that the percentage change in corporate income over the business cycle is several times greater than that in any other macroeconomic series in his study.2 Robert Lucas lists the high conformity and large variation of corporate income as one of the seven main qualitative features of the business cycle.3 The volatility of internal finance, which is also com-

What Do We Know About Capital Structure? Some Evidence from International Data

Abstract: We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as important in determining the cross- section of capital structure in the U.S. affect firm leverage in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved.

The Financial Accelerator in a Quantitative Business Cycle Framework

Abstract: This paper develops a dynamic general equilibrium model that is intended to help clarify the role of credit market frictions in business fluctuations, from both a qualitative and a quantitative standpoint. The model is a synthesis of the leading approaches in the literature. In particular, the framework exhibits a financial accelerator,' in that endogenous developments in credit markets work to amplify and propagate shocks to the macroeconomy. In addition, we add several features to the model that are designed to enhance the empirical relevance. First, we incorporate money and price stickiness, which allows us to study how credit market frictions may influence the transmission of monetary policy. In addition, we allow for lags in investment which enables the model to generate both hump-shaped output dynamics and a lead-lag relation between asset prices and investment, as is consistent with the data. Finally, we allow for heterogeneity among firms to capture the fact that borrowers have differential access to capital markets. Under reasonable parametrizations of the model, the financial accelerator has a significant influence on business cycle dynamics.

What Do We Know about Capital Structure? Some Evidence from International Data

Abstract: We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as correlated in the cross-section with firm leverage in the United States, are similarly correlated in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved.

Inside the Black Box: The Credit Channel of Monetary Policy Transmission

Abstract: The 'credit channel' theory of monetary policy transmission holds that informational frictions in credit markets worsen during tight- money periods. The resulting increase in the external finance premium--the difference in cost between internal and external funds-- enhances the effects of monetary policy on the real economy. We document the responses of GDP and its components to monetary policy shocks and describe how the credit channel helps explain the facts. We discuss two main components of this mechanism, the balance-sheet channel and the bank lending channel. We argue that forecasting exercises using credit aggregates are not valid tests of this theory.