In recent years a large number of studies have used the identified-VAR methodology to assess the effects of monetary shocks. This literature documents that contractionary monetary shocks have a persistent negative effect on output and employment, and a persistent positive effect on interest rates. For example, Christiano, Eichenbaum, and Evans (1999) review a number of different approaches for identifying monetary shocks, and find that interest rates rise for at least six month after a contractionary monetary shock, whereas the negative effect on out put lasts for well over a year. These conclusions are robust across most identification schemes for monetary shocks used in the literature.
The implementation of the 2006 new Basel accord is a major reform in the banking area but it already gives rise to occasionally harsh criticism, notably on the new measures of banking risks (Altman and al. (2001, 2002); Kirstein (2002) for example). Among other potential pitfalls, the new Basel accord might decrease lending to emerging countries and cause procyclicity of credit. Criticism of the1988 Basel accord has already been severe.
The 1988 implementation of the capital requirement ratio has not only failed to reduce the frequency of banking crises, but several studies have highlighted its impact in terms of economic slowdown and domestic credit crunch.
The use of accounting numbers in lending agreements is considered to be an important part of the demand for accounting. The accounting choice literature hypothesizes that managers make accounting choices, such as manipulating net income, to avoid tripping accounting-based loan covenants. Much of this body of research presumes that debt covenants are frequently used and that the form of the covenants is standard boiler-plate. However, recent research by Begley and Freedman [2004] calls into question the prevalence and importance of loan covenants.
They examine the use of accounting-based covenants in senior public debt issued in three different time periods (the late 1970s, 1989-1993 and 1999-2002), reporting that covenant use has declined sharply over the last three decades. In addition, they find that the form of debt covenants appears to be shifting away from measures that can be affected by accounting choices to measures that are closer to cash flows. While Begley and Freedman uncover some interesting data regularities, they do not investigate explanations for this dramatic change.
