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Bank Lending and Asset Prices in the Euro Area

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  • Frömmel, Michael
  • Schmidt, Torsten

Abstract

We examine the dynamics of bank lending to the private sector for countries of the Euro area by applying a Markov switching error correction model. We identify for Belgium, Germany, Ireland and Portugal stable, mean reverting regimes and unstable regimes with no tendency to return to the long term credit demand equation, whereas for some other countries there is only weak evidence. Furthermore, for these as well as for other countries we detect in the less stable regimes a strong comovement with the development of the stock market. We interpret this as evidence for constraints in bank lending. In contrast, the banks' capital seems to have only marginal impact on the lending behaviour.

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Bibliographic Info

Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-342.

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Length: 24 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:han:dpaper:dp-342

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Keywords: bank lending; credit demand; Euro area; Markov switching error correction; credit channel; asset prices; credit rationing;

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Cited by:
  1. Cyril Pouvelle, 2012. "Bank Credit, Asset Prices and Financial Stability," IMF Working Papers 12/103, International Monetary Fund.
  2. Bouvatier, Vincent & López-Villavicencio, Antonia & Mignon, Valérie, 2014. "Short-run dynamics in bank credit: Assessing nonlinearities in cyclicality," Economic Modelling, Elsevier, vol. 37(C), pages 127-136.

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