This paper estimates a six-variable VAR model and simulates generalized impulse response functions to assess dynamic interactions between bank loans and stock prices and evaluate whether bank loans play a role in transmitting financial shocks to the real sector. We find evidence that bank loans react positively to the increase in stock prices but there seems to be no influence from bank loans to stock prices. Similarly, bank loans seem to accommodate expansion in real output with, again, no influence of bank loans on real economic activity. Interestingly, despite the noted currency mismatch of bank assets and liabilities as a factor that aggravates the currency crisis, we find no evidence that the exchange rate fluctuations have impact on bank lending. If anything, the exchange rate seems to affect bank lending activities through its effects on real output and stock prices. From the dynamic responses, we tend to conclude that bank loans play no significant role in transmitting stock market shocks to the real sector. An important implication from our analysis is that the health of the banking sector depends crucially on stock market stability and real output stability. Additionally, policy attempts to stimulate bank loans as a way to boost stock market activities as well as to expand real activities may be futile.
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Find related papers by JEL classification: E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
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