Relative to the baseline, there is an additional large and persistent boom in the middle of the simulation, followed by a period of below counterfactual fundamentals. The path of the economy is more volatile, with deviations from trend larger and more persistent. In other words, the credit cycle has real and adverse consequences. Chart 2 Model simulation with low reputational weight  Source: Bank calculations. Chart 3 Model simulation with high reputational weight  Source: Bank calculations. 8  BIS Review 168/2010  2.4  Empirical implications  Several empirical implications follow from the model. First, strategic complementarities incentivise banks to adopt risky strategies in a coordinated fashion during the boom. So the dynamics of the model predict that we should observe cycles in financial activity at a macroeconomic level. Initial productivity improvements are amplified into lending booms, which are followed by credit busts and, potentially, crises. Second, at a micro-economic level, the coordination of risky strategies during the boom should compress the dispersion of bank earnings, as low ability banks masquerade as high ability banks during good times. But during the bust, when the macro state turns bad, the dispersion of banks’ earnings should increase as low ability types crystallise losses while high ability types do not. We turn next to the macro and micro evidence. 3.  Credit cycle dynamics  To what extent are the macroeconomic credit cycle dynamics predicted by the model present in the real world? To assess that, we draw on a dataset recently developed by Schularick and Taylor (2009).
As a macroeconomist whose work is grounded in thorough analysis, and a profound knowledge of models and data, he also takes into account the policy implications of the findings of his research. This is an important factor as he is a pioneer who has done groundbreaking work, and his research frequently encourages others. In this respect his work on the global decline in labour’s share of income has prompted a number of papers from academia and different institutions so as to understand this change over time and its implications for income distribution and productivity. Similarly, his work on capital allocation and productivity in Southern Europe has been widely influential. Mr. Karabarbounis, congratulations on my behalf and on that of the Banco de España. 2