The BBVA Foundation Frontiers of Knowledge Award in Economics, Finance and Business Management has been awarded to Ben Bernanke, Mark Gertler, Nobuhiro Kiyotaki y John Moore “for their fundamental contributions to understanding how imperfections in financial markets can amplify macroeconomic fluctuations and generate deep recessions,” according to the minutes of the thirteenth edition of the award.
In the jury’s opinion, in the last 15 years “strong macroeconomic shocks” arising from the financial sphere have hit “advanced economies”.
In the current health crisis, the contributions of the four winners play “a crucial role”, as they already did in the Great Recession and the sovereign debt crisis in the euro zone. All of them have in common “weak balance sheets” in companies, whether financial or not. “The macroeconomic effects of weak balance sheets had been largely ignored before the 1990s, even though their importance is crucial.”
In the case of the work of professors Bernanje and Gertler, the importance is reflected in their paper ‘Agency Costs, Collateral, and Business Fluctuations’, which was published in 1989, in which they show that when a company goes out to raise financing in the market, the state of its balance sheet is key.
Thus, if the company presents a weak financial situation, the premium it must pay for financing will increase and this in turn will reduce its ability to acquire loans and, therefore, its investment and its productive activity. This reduction in activity will drag down the cash flows and the price of its assets and capital, which will lead to a further deterioration of the balance sheet and will generate a negative loop.
For their part, Kiyotaki and Moore receive the price for their namesake model. The Kiyotaki-Moore model introduces 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).
In the jury’s opinion, the work of the four winners fueled “a vast literature that expanded especially rapidly after the great financial crises of 2008 clearly demonstrated the relevance of their ideas. Thanks to their contributions, it is now commonplace for economists to analyze the implications that corporate 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. “
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