MAJOR IDEAS IN THE HISTORY OF AGRICULTURAL FINANCE AND FARM MANAGEMENT

This paper contains two articles that discuss major ideas from the history of agricultural finance and farm management. The agricultural finance article focuses on ideas that emerged prior to 1960. These ideas are classified into those emerging from action and scientific-framing eras. The second article characterizes the evolution of farm management and production economics from its beginnings in about 1900 to the start of the 21st century. Emphasis is placed on the melding of ideas from agriculturalists and economists.Agricultural finance, farm management, production economics, Agricultural Finance,

Credit Rationing and Internal Ratings in the Face of Innovation and Uncertainty

Some empirical investigations are pointing to the fact that high-tech firms are subject to credit rationing to a higher extent than the avereage. This excess of credit rationing may not be due top information asymmetries, but rather to the inability of credit institutions to screen projects in novel fields. This article provides a model of this phenomenon and explores its implications in the light of recent changes in the screening procedures of major banks. In particular, the changes to be made in order to comply with the "Basel II" accord emphasise the impact of screening procedures on credit rationing

Capital market imperfections, uncertainty and corporate investment in the Czech Republic

The well-known Klein-Monti model of bank behavior considers a monopolistic bank. We demonstrate that this model’s results on the comparative static effects of a change in the exogenous interbank market interest rate do not necessarily hold in oligopolistic Cournot or Stackelberg generalizations. Introducing asymmetries in the cost functions of the banks, or in their way of conduct, may imply counterintuitive effects on the individual banks’ volumes of loans and deposits. Keywords: Bank behavior, Cournot oligopoly, Stackelberg oligopoly

Towards a typology for systemic financial instability

This article seeks to provide a categorisation of events of systemic financial instability that have been experienced in recent decades, seeking to draw out common elements from these seemingly-diverse events. We maintain that despite the apparent diversity of events of financial instability, a useful summary categorisation is between bank, market-price and market-liquidity based crises. There are important subcategories of each type, such as domestic versus international, currency crisis linked, single-institution based, equity-related, property, commodities, deregulation and disintermediation linked crises. Such financial crises are usefully examined in the light of the theories of financial instability, not least to illuminate common generic patterns that can be helpful in macroprudential surveillance. We derive a framework for analysing the evolution of such crises, highlighting that it is vulnerability of a financial system that is the key common element to a crisis, besides the nature of propagation of a crisis to the wider economy. Besides having general applicability, notably to OECD countries, the typology and generic features have some relevant implications for euro area countries. Development of securities markets, the likelihood of regional crises and the likely impact of ageing are among aspects that warrant vigilance by policy makers in the euro zone

Price Flexibility, Credit Rationing, and Economic Fluctuations: Evidence from the U.S., 1879-1914

The reawakening of interest in links between price flexibility and fluctuations in economic activity calls for a reconsideration of models of price and quantity adjustment. We examine relationships between credit disturbances and real activity under flexible prices, using monthly data on real and financial variables over the period from 1879-1914. Recent theoretical and empirical work has focused on models and institutions of the post World War II period. Historical episodes of pronounced business cycles, however, challenge our present formulations of the causes of fluctuations in output and employment. In this paper we pursue two goals: (i) to demonstrate that substantial price flexibility existed during the period to point out that models of economic fluctuations relying on sticky prices are not appropriate for analyzing the period, and (ii) to consider the effects of deflationary shocks on real variables in such a world. Our principal findings are two. First, we present evidence from several empirical tests to corroborate the stylized fact of price flexibility during our period of study (relative to patterns of flexibility observed in postwar data). Contrary to conclusions of many models applied to postwar data, we find that shocks to inflation rates produce positive and persistent effects on output.Second, extending earlier examinations of credit rationing as an outcome under imperfect information, we motivate this link by considering the impact of deflation on credit availability. The addition of measures of credit rationing accompanying deflation contributes substantially to our empirical explanation of output fluctuations during the period.

Imperfect Information and Monopolistic Pricing in the Banking Industry

We critically discuss recent developments in the theory of banking, focusing on the two set of services that banks jointly provide: payment services by means of bookkeeping transactions and financial intermediation services. The limitation of the available information, of the capabilities of the human mind, and of the available time of any individual, produce relevant departures from the basic assumptions of perfectly competitive markets, creating the need for institutions such as banks. It can be shown that market forces can be very effective in assuring contractual performance in the banking industry, reducing the need of generalised legal restrictions. Besides, taking into account the peculiarities of contemporary banking institutions, credit rationing seems to be a far less significant phenomenon. The main conclusion of the analysis is that the focus of many current regulations of the banking system, in continental Europe in particular, is misplaced. The current regulatory framework produces too many distortions in market prices and the allocation of resources, and regulations impose a heavy burden on taxpayers. On the contrary, the more fundamental causes of instability are not properly addressed by the current legal requirements.

Making Bad Decisions: firm size and investment under uncertainty

This paper presents a 'real options' model of investment under uncertainty, which incorporates the assumption of a financial market characterised by asymmetric information and which can explain the stylised facts of firm growth. The decision-making situation faced by small and medium-sized enterprises (SMEs) features much greater constraints on the ability to gather information in order to reduce uncertainty about their investment opportunities, compared with that faced by large companies (LCs). This necessarily causes relatively poor decision-making by SMEs, and explains their substantial death rates.

The evolution of the financial crisis of 2007–8

The financial crisis that started in August 2008 reached a climax in the autumn of 2008 with a wave of bank nationalisations across North America and Europe. Although banking crises are not uncommon, this is the largest since 1929–33. This paper discusses the build-up to the crisis, looking at the role of low real interest rates in stimulating an asset price bubble. That bubble was stocked by financial innovation and increases in lending. New financial products were not stress tested and have failed in the downturn. After discussing the bubbles we look at the collapse of the complex asset structure, and then put the crisis in the context of the literature. The paper concludes with a discussion of policy implications of the crisis, and advocates a significant improvement in the regulatory structure

A Model of Firm Behaviour with Equity Constraints and Bankruptcy Costs

Based on Greenwald and Stiglitz (1988,1990), this work explores a simple model of microeconomic behaviour which incorporates the impact of capital markets imperfections generated by asymmetric information on firms’ optimal investment decision rules. In particular, this paper analyses how a specific form of asymmetric information problem (adverse selection) may imply lower investment than otherwise through the reduction of the firms’ ability to raise external financing – either in the form of credit rationing or the ‘voluntary’ reduction of firms’ borrowing activity. The natural follow-up to this work would be to formally show how a loan market where both contractual interest rates and loan sizes are (a priori) variable may be characterised by a credit rationing equilibrium.Asymmetric Information, Firm Behaviour, Investment Financing

Interacting demand and supply conditions in European bank lending

This paper investigates credit channel of monetary policy by accounting for simultaneous interaction of banks' and firms' credit conditions and their adjustment costs, which are neglected in the previous studies. Based on the European data we find that these conditions are interacting, although their adjustment costs differ across banks, firm size, countries, and over time. The results suggest that a common European monetary policy should then deal with uncertainty over credit market conditions and firms' and banks' country-specific and size-dependent reactions. It should also monitor large firms' exploitation of banks' credit rationing as it can have great impacts on the smaller firms' lending and financial stability conditions.Demand and Price Analysis,