The Transmission Channels between Financial Sector and Real Economy in Light of the Current Financial Crisis a Critical Survey of the Literature

Georgios L. Vousinas

Department of Economics, Athens University, Athens, Greece.

DOI: 10.4236/me.2013.44028                

Abstract

The present study undertakes a critical review of the research around the major issue of the transmission channels between financial sector and real economy. The aim of the study is to shed light on the interaction between the financial system and the economy, in the shadow of the current crisis. The literature documents the importance of these channels in the determination of economic activity and therefore, real economy as a whole. The study highlights the emergence of the liquidity channel as a key factor of the transmission of bank credit shocks to real economy and underlines the existing “regulation gaps”. The paper concludes that the financial sector plays an even more crucial role these days and drastic measures along with intense supervision must be undertaken so as to work properly and serve the economic world.

Keywords

Transmission Channels; Bank Lending Channel; Financial Crisis; Regulation; Liquidity

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	B. S. Bernanke and M. Gertler, “Inside the Black Box: The Credit Channel of Monetary Policy Transmission,” Journal of Economic Perspectives, Vol. 9, No. 4, 1995, pp. 27-48. doi:10.1257/jep.9.4.27
[2]	B. S. Bernanke and M. Gertler, “Agency Costs, Net Worth, and Business Fluctuations,” American Economic Review, Vol. 79, No. 1, 1989, pp. 14-31.
[3]	N. Kiyotaki and J. Moore, “Credit Cycles,” Journal of Political Economy, Vol. 105, No. 2, 1997, pp. 211-248. doi:10.1086/262072
[4]	B. Holmstrom and J. Tirole, “Financial Intermediation, Loanable Funds, and the Real Sector,” Quarterly Journal of Economics, Vol. 112, No 3, 1997, pp. 663-691. doi:10.1162/003355397555316
[5]	B. S. Bernanke and A. S. Blinder, “Credit, Money, and Aggregate Demand,” American Economic Review, Vol. 78, No. 2, 1988, pp. 435-439.
[6]	J. C. Stein, “An Adverse-Selection Model of Bank Asset and Liability Management with Implications for the Transmission of Monetary Policy,” RAND Journal of Economics, Vol. 29, No. 3, 1998, pp. 466-486. doi:10.2307/2556100
[7]	S. J. Van den Heuvel, “Does Bank Capital Matter for Monetary Transmission?” Federal Reserve Bank of New York Economic Policy Review, Vol. 8, No. 1, 2002, pp 259-265.
[8]	P. Lowe, “Credit Risk Measurement and Procyclicality,” BIS Working Paper, No. 116, Basel, 2002.
[9]	C. E. V. Borio, C. Furfine and P. W. Lowe, “Procyclicality of the Financial System and Financial Stability: Issues and Policy Options,” BIS Working Paper, No. 1, Basel, 2001.
[10]	E. I. Altman and A. Saunders, “An Analysis and Critique of the BIS Proposal on Capital Adequacy and Ratings,” Journal of Banking and Finance, Vol. 25, No. 1, 2001, pp. 25-46. doi:10.1016/S0378-4266(00)00116-3
[11]	C. A. E. Goodhart, B. Hofmann and M. Segoviano, “Bank Regulation and Macroeconomic Fluctuations,” Oxford Review of Economic Policy, Vol. 20, No. 4, 2004, pp. 591-615. doi:10.1093/oxrep/grh034
[12]	K. T. Jacques, “Capital Shocks, Bank Asset Allocation, and the Revised Basel Accord,” Review of Financial Economics, Vol. 17, No. 2, 2008, pp. 79-91. doi:10.1016/j.rfe.2007.03.003
[13]	I. Fisher, “The Debt-Deflation Theory of Great Depressions,” Econometrica, Vol. 1, No. 4, 1933, pp. 337-357. doi:10.2307/1907327
[14]	D. W. Diamond and P. H. Dybvig, “Bank Runs, Deposit Insurance, and Liquidity,” Journal of Political Economy, Vol. 91, No. 3, 1983, pp. 401-419. doi:10.1086/261155
[15]	D. W. Diamond and R. G. Rajan, “The Credit Crisis: Conjectures about Causes and Remedies,” American Economic Review, Vol. 99, No. 2, 2009, pp. 606-610. doi:10.1257/aer.99.2.606
[16]	M. K. Brunnermeier and L. H. Pedersen, “Market Liquidity and Funding Liquidity,” NBER Working Papers, No. 12939, 2007.
[17]	W. Wagner, “Diversification at Financial Institutions and Systemic Crises,” Tilburg University Center for Economic Research Discussion Paper, No. 71, 2006.
[18]	W. Wagner, “The Homogenization of the Financial System and Financial Crises,” Journal of Financial Intermediation, Vol. 17, No. 3, 2008, pp. 330-356. doi:10.1016/j.jfi.2008.01.001
[19]	T. Adrian and H. S. Shin, “Liquidity and Financial Contagion,” Banque de France Financial Stability Review, No. 11, 2008, pp. 1-8.
[20]	F. Allen and D. Gale, “Financial Contagion,” Journal of Political Economy, Vol. 108, No. 1, 2000, pp. 1-33. doi:10.1086/262109
[21]	S. Brusco and F. Castiglionesi, “Liquidity Coinsurance, Moral Hazard, and Financial Contagion,” Journal of Finance, Vol. 62, No. 5, 2007, pp. 2275-2302. doi:10.1111/j.1540-6261.2007.01275.x
[22]	P. Strahan, “Liquidity Production in 21st Century Banking”, NBER Working Papers, No. 13798, 2008.
[23]	D. Gromb and D. Vayanos, “Leverage and Liquidity Dry-Ups: A Framework and Policy Implications,” 2008.
[24]	V. V. Acharya and S. Viswanathan, “Moral Hazard, Collateral and Liquidity,” Centre for Economic Policy Research, 2008.
[25]	O. Jeanne and L. E. O. Svensson, ‘Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank,” American Economic Review, Vol. 97, No. 1, 2007, pp. 474-490. doi:10.1257/aer.97.1.474
[26]	J. Bullard, “Seven Faces of the Peril,” Federal Reserve Bank of St. Louis Review, Vol. 92, No. 5, 2010, pp. 339-352
[27]	R. J. Caballero, T. Hoshi and A. K. Kashyap, “Zombie Lending and Depressed Restructuring in Japan,” American Economic Review, Vol. 98, No. 5, 2008, pp. 1943-1977. doi:10.1257/aer.98.5.1943
[28]	T. Jappelli and M. Pagano, “Information Sharing in Credit Markets,” Journal of Finance, Vol. 48, No. 5, 1993, pp. 1693-1718. doi:10.2307/2329064
[29]	T. Jappelli and M. Pagano, “Information Sharing, Lending and Defaults: Cross-Country Evidence,” Journal of Banking and Finance, Vol. 26, No. 10, 2002, pp. 2017-2045.
[30]	A. Matuszyk and L. Thomas, “The Evolution of Credit Bureaus in European Countries,” Journal of Financial Transformation, Vol. 23, 2008, pp. 135-144.