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Credit Matters

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Author Info

  • Tamim Bayoumi
  • Ola Melander

Abstract

This paper develops a framework for analyzing macro-financial linkages in the United States. We estimate the effects of a negative shock to banks'' capital/assetratio on lending standards, which in turn affect consumer credit, mortgages, and corporate loans, and the corresponding components of private spending (consumption, residential investment and business investment). In addition, our empirical model allows for feedback from spending and income to bank capital adequacy and credit. Hence, we trace the full credit cycle. An exogenous fall in the bank capital/asset ratio by one percentage point reduces real GDP by some 1½ percent through its effects on credit availability, while an exogenous fall in demand of 1 percent of GDP is gradually magnified to around 2 percent through financial feedback effects.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/169.

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Length: 27
Date of creation: 01 Jul 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/169

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Related research

Keywords: Credit; External shocks; Asset ratio; Consumer credit; Corporate sector; Gross domestic product; standards; bank capital; bank credit; capital adequacy; bank balance sheets; bank lending; banking; bank loans; mortgage loan; banks ? balance sheet; bank loan; deposit insurance; bank assets; recapitalization; federal deposit insurance; bank lenders; bank equity; capital adequacy ratio; mortgage lending; bank loan officers; bank capitalization; bank size; bank performance; banks ? balance sheets;

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References

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  1. Lown, Cara & Morgan, Donald P., 2006. "The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(6), pages 1575-1597, September.
  2. Ludvigson, Sydney, 1998. "The Channel of Monetary Transmission to Demand: Evidence from the Market for Automobile Credit," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(3), pages 365-83, August.
  3. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  4. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 20(3), pages 559-88, August.
  5. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 8(3), pages 265-79, July.
  6. Dynan, Karen E. & Elmendorf, Douglas W. & Sichel, Daniel E., 2006. "Can financial innovation help to explain the reduced volatility of economic activity?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(1), pages 123-150, January.
  7. Joe Peek & Eric Rosengren, 1991. "The capital crunch: neither a borrower nor a lender be," Working Papers, Federal Reserve Bank of Boston 91-4, Federal Reserve Bank of Boston.
  8. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  9. Oliner, Stephen D & Rudebusch, Glenn D, 1996. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 300-309, March.
  10. Bacchetta, Philippe & Gerlach, Stefan, 1997. "Consumption and credit constraints: International evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(2), pages 207-238, October.
  11. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(1), pages 121-41, February.
  12. Dell''Ariccia, Giovanni & Igan, Deniz & Laeven, Luc, 2008. "Credit Booms and Lending Standards: Evidence From The Subprime Mortgage Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6683, C.E.P.R. Discussion Papers.
  13. Ben S. Bernanke & Alan S. Blinder, 1988. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
  14. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, American Economic Association, vol. 84(5), pages 1397-1408, December.
  15. Giovanni Dell'Ariccia & Luc Laeven & Deniz Igan, 2008. "Credit Booms and Lending Standards," IMF Working Papers 08/106, International Monetary Fund.
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