Bernanke, Gertler, Kiyotaki and Moore win the BBVA Frontiers of Knowledge award | Economy

The BBVA Foundation announced this Thursday the award of the Frontiers of Knowledge in Economics award to professors and economists Ben Bernanke, Mark Gertler, Nobuhiro Kiyotaki and John Moore for “establishing the interrelation between the financial sector and the real economy and its amplifying effect in crises ”. The jury noted that all of them have contributed to bringing to the fore the macroeconomic consequences of weak balance sheets, something that before the 1990s had been widely ignored. “What the Great Recession, the European debt crisis and the current COVID recession have in common are weak balance sheets” in companies, financial and non-financial, said those responsible for granting the award.

Bernanke, an expert on the Great Depression, is the best known of them all for having assumed the presidency of the Federal Reserve between 2006 and 2014, where he was nominated successively by George W. Bush and Barack Obama, presidents of different political colors, and he he had to face the convulsive period of the Great Recession. BBVA has taken into account the publication it made in 1989 in the magazine American Economic Review together with Mark Getler (New York University), one of the most cited economists in the world, where both showed that a “negative feedback loop” is established between the balance sheets of companies, their investments and their productive capacity, which can spread until giving rise to a macroeconomic crisis. The model shows that if a company must go out to raise financing in the market, the state of its balance sheet is key: if the company has a weak financial situation, the premium it must pay for financing will increase, which will reduce its ability to acquire loans and, therefore, their investment and their productive activity, which will drag down the cash flows and the price of their assets and capital and will lead to a further deterioration of the balance sheet.

As explained by the BBVA Foundation, in subsequent work Bernanke and Gertler introduced the credit channel, the amplifying effect that banks’ loan dynamics add to this vicious circle: when evaluating a transaction, banks take the value into account. of the investments to be financed, but also the economic cycle and the financial statements of the companies that request the loans. The balance sheets of companies that are deteriorated by the impact of a crisis extended to the real economy have more difficult access to the banking channel, adding that new feedback multiplier effect. This channel, as detailed in the jury’s minutes, “shows how weak banks lead to a credit crisis, in which fragile companies that depend on their relationship with the banks suffer.”

In the case of the other two winners, Professors Noburo Kiyotaki (Princeton University), and John Moore (University of Edinburgh), who met at the London School of Economics, the jury highlights that they were able to explain a new amplifying effect of this negative loop: the double condition of the assets that companies use as collateral against possible loan defaults (as a productive asset and as collateral).

The award, which in certain cases has been the prelude to the Nobel for some of the winners, has an important link with today’s economic situation. In the current crisis derived from the covid-19 pandemic, the weakness of the balance sheets of the companies is once again in the spotlight, and as the jury points out, “it worries that they cannot survive without a prolonged injection of money by the governments and central banks ”.

Its members conclude that the investigations of the four winners have inspired “a vast literature that grew particularly fast after the great financial crises of 2008 evidenced the relevance of their ideas.” And he points out that it has served as a starting point for new jobs. “Thanks to their contributions, today it is common for economists to analyze the implications that company balance sheets have on monetary policy, for capital controls, to understand the role of shadow banking – and its associated dangers – and for prudential regulatory reforms ”.

–