Centre for Development Economics
Department of Economics
Delhi School of Economics
ANNOUNCE A SEMINAR
Endogenous Lending Standards and Boom-Bust Cycles
by
Vivek Sharma
(CASMEF (Arcelli Center for Monetary and Financial Studies), Rome and CAMA)
(Thursday, September 11, 2025, at 3:10 PM, IST )
Venue: Amex Room
Abstract:-
This paper examines the effects of credit expansion in an economy featuring bank-firm lending relationships in which banks compete both on interest rates and lending standards. I show that a one-time credit expansion – modelled by a jump in loan-to-deposit (LTD) ratio – endogenously leads to boom-bust cycles in macroeconomic aggregates. These dynamics are amplified by presence of bank-firm lending relationships. The version of the model that abstracts from these credit relationships, fails to capture sharp reversal, deep bust and slow macroeconomic recovery often associated with credit-driven booms. These boom-bust cycles are larger at greater intensity and persistence of lending relationships and also when initial credit expansion is bigger or is more persistent. I also show that these boom-bust cycles are several orders of magnitude larger in an economy that features dual competition on interest rates and credit standards versus the case when only competition on interest rate is taken into account. Additionally, the version without credit standards cannot explain the rapid loosening of lending standards during a boom. These findings suggest that credit expansion can lead to larger boom-bust cycles than previously documented and it’s important to consider both interest rates and credit standards to fully capture these dynamics.