Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the "Great Moderation"?

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Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach

/pdf/the-theory-of-industrial-organization-19bejph0ej.pdf

The Theory of Industrial Organization

Relationship Banking: What Do We Know?

This paper models the inner workings of relationship lending, the implications for bank organisational structure, and the effects of shocks to the economic environment on the availability of relationship credit to small businesses. Relationship lending depends on the accumulation over time by the loan officer of 'soft' information. Because the loan officer is the repository of this soft information, agency problems are created throughout the organisation that may best be resolved by structuring the bank as a small, closely-held organisation with few managerial layers. The shocks analysed include technological innovations, regulatory regime shifts, banking industry consolidation, and monetary policy shocks. The issue of credit availability to small firms has garnered world-wide concern recently. Models of equilibrium credit rationing that point to moral hazard and adverse selection problems (eg, Stiglitz and Weiss, 1981) suggest that small firms may be particularly vulnerable because they are often so informationally opaque. That is, the informational wedge between insiders and outsiders tends to be more acute for small companies, which makes the provision of external finance particularly challenging. Small firms with opportunities to invest in positive net present value projects may be blocked from doing so because potential providers of external finance cannot readily verify that the firm has access to a quality project (adverse selection problem) or ensure that the funds will not be diverted to fund an alternative project (moral hazard problem).

/pdf/small-business-credit-availability-and-relationship-lending-4ab2boh9lc.pdf

Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure

We propose a more complete conceptual framework for analysis of SME credit availability issues. In this framework, lending technologies are the key conduit through which government policies and national financial structures affect credit availability. We emphasize a causal chain from policy to financial structures, which affect the feasibility and profitability of different lending technologies. These technologies, in turn, have important effects on SME credit availability. Financial structures include the presence of different financial institution types and the conditions under which they operate. Lending technologies include several transactions technologies plus relationship lending. We argue that the framework implicit in most of the literature is oversimplified, neglects key elements of the chain, and often yields misleading conclusions. A common oversimplification is the treatment of transactions technologies as a homogeneous group, unsuitable for serving informationally opaque SMEs, and a frequent misleading conclusion is that large institutions are disadvantaged in lending to opaque SMEs.

/pdf/a-more-complete-conceptual-framework-for-sme-finance-4xac6ul2wa.pdf

A more complete conceptual framework for SME finance

Relationship lending within a bank-based system: evidence from european small business data

We study the effect on loan conditions of geographical distance between firms, the lending bank, and all other banks in the vicinity. For our study, we employ detailed contract information from more than 15,000 bank loans to small firms comprising the entire loan portfolio of a large Belgian bank. We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending. Loan rates decrease with the distance between the firm and the lending bank and increase with the distance between the firm and competing banks. Transportation costs cause the spatial price discrimination we observe.

/pdf/distance-lending-relationships-and-competition-50y5ikoocy.pdf

Distance, Lending Relationships and Competition

/pdf/interbank-exposures-an-empirical-examination-of-systemic-ibipf78yzf.pdf

Interbank exposures: an empirical examination of systemic risk in the

We study the impact of firm and industry characteristics on small firms’ capital structure, employing a proprietary database containing financial statements of Dutch small and medium-sized enterprises (SMEs) from 2003 to 2005. The firm characteristics suggest that the capital structure decision is consistent with the pecking-order theory: Dutch SMEs use profits to reduce their debt level, and growing firms increase their debt position since they need more funds. We further document that profits reduce in particular short-term debt, whereas growth increases long-term debt. We also find that inter- and intra-industry effects are important in explaining small firms’ capital structure. Industries exhibit different average debt levels, which is in line with the trade-off theory. Furthermore, there is substantial intra-industry heterogeneity, showing that the degree of industry competition, the degree of agency conflicts, and the heterogeneity in employed technology are also important drivers of capital structure.

/pdf/the-impact-of-firm-and-industry-characteristics-on-small-oyggvcgq1x.pdf

The impact of firm and industry characteristics on small firms' capital structure

Robust (cross-border) interbank markets are important for the well functioning of modern financial systems. Yet, a network of interbank exposures may lead to domino effects following the event of an initial bank failure. We investigate the evolution and determinants of contagion risk for the Belgian banking system over the period 1993-2002 using detailed information on aggregate interbank exposures of individual banks, large bilateral interbank exposures, and cross-border interbank exposures. The structure of the interbank market affects contagion risk. We find that a change from a complete structure (where all banks have symmetric links) towards a "multiple money centre" structure (where money centres are symmetrically linked to otherwise disconnected banks) has decreased the risk and impact of contagion. In addition, an increase in the relative importance of cross-border interbank exposures has lowered local contagion risk. Yet, this reduction may have been compensated by an increase in contagion risk stemming from foreign banks.

/pdf/interbank-exposures-an-empirical-examination-of-systemic-4qagx3wlcc.pdf

Hans Degryse

Papers

Relationship lending within a bank-based system: evidence from european small business data

Distance, Lending Relationships and Competition

Interbank exposures: an empirical examination of systemic risk in the

The impact of firm and industry characteristics on small firms' capital structure

Interbank Exposures: An Empirical Examination of Systemic Risk in the Belgian Banking System