Relationship banking and the credit market in India: An empirical analysis
AbstractRelationship banking based on Okun's "customer credit markets" has important implications for monetary policy via the credit transmission channel. Studies of LDC credit markets from this point of view seem to be scanty and this paper attempts to address this lacuna. Relationship banking implies short-term disequilibrium in credit markets, suggesting the VECM (vector error-correction model) as an appropriate framework for analysis. We develop VECM models in the Indian context (for the period April 1991- December 2004 using monthly data) to analyse salient features of the credit market. An analysis of the ECMs (error-correction mechanisms) reveals that disequilibrium in the Indian credit market is adjusted via demand responses rather than supply responses, which is in accordance with the customer view of credit markets. Further light on the working of the model is obtained through the "generalized" impulse responses and "generalized" error decompositions (both of which are independent of the variable ordering). Our conclusions point towards firms using short-term credit as a liquidity buffer. This fact, together with the gradual adjustment exhibited by the "persistence profiles" provides substantive evidence in favour of "customer credit markets".
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2005-10.
Length: 42 pages
Date of creation: 2005
Date of revision:
Contact details of provider:
Postal: Gen. A. K. Vaidya Marg, Goregaon (E), Mumbai 400065
Phone: (022) 840 0919/20/21
Fax: (022) 840 2752/2026
Web page: http://www.igidr.ac.in
More information through EDIRC
customer credit markets; monetary policy; co-integration; impulse response; persistence profiles;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pesaran, M.H. & Shin, Y., 1993.
"Cointegration and Speed of Convergence to Equilibrium,"
Cambridge Working Papers in Economics
9311, Faculty of Economics, University of Cambridge.
- Pesaran, M. Hashem & Shin, Yongcheol, 1996. "Cointegration and speed of convergence to equilibrium," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 117-143.
- Steven A. Sharpe, 1989.
"Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships,"
Finance and Economics Discussion Series
70, Board of Governors of the Federal Reserve System (U.S.).
- Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Haan, L. de & Koedijk, C.G. & Vrijer, E.J. de, 1994. "Buffer stock money and pecking order financing: Results from an interview study among Dutch firms," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3108622, Tilburg University.
- Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
- Franses,Philip Hans, 1998. "Time Series Models for Business and Economic Forecasting," Cambridge Books, Cambridge University Press, number 9780521586412, December.
- Fair, Ray C & Jaffee, Dwight M, 1972. "Methods of Estimation for Markets in Disequilibrium," Econometrica, Econometric Society, vol. 40(3), pages 497-514, May.
- Bernanke, Ben S., 1993. "How important is the credit channel in the transmission of monetary policy? : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 47-52, December.
- Benjamin M. Friedman & Kenneth N. Kuttner, 1993.
"Economic Activity and the Short-term Credit Markets: An Analysis of Prices and Quantities,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 24(2), pages 193-284.
- Benjamin M. Friedman & Kenneth N. Kuttner, 1993. "Economic activity and the short-term credit markets: an analysis of prices and quantities," Working Paper Series, Macroeconomic Issues 93-17, Federal Reserve Bank of Chicago.
- Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
- Ramey, Valerie, 1993.
"How important is the credit channel in the transmission of monetary policy?,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 39(1), pages 1-45, December.
- Valerie A. Ramey, 1993. "How Important is the Credit Channel in the Transmission of Monetary Policy?," NBER Working Papers 4285, National Bureau of Economic Research, Inc.
- Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
- Pesaran, M Hashem, 1997.
"The Role of Economic Theory in Modelling the Long Run,"
Royal Economic Society, vol. 107(440), pages 178-91, January.
- Pesaran, M.H., 1996. "The Role of Economic Theory in Modelling the Long Run," Cambridge Working Papers in Economics 9612, Faculty of Economics, University of Cambridge.
- Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
- Fase, M. M. G., 1995. "The demand for commercial bank loans and the lending rate," European Economic Review, Elsevier, vol. 39(1), pages 99-115, January.
- Maddala, G S & Nelson, Forrest D, 1974. "Maximum Likelihood Methods for Models of Markets in Disequilibrium," Econometrica, Econometric Society, vol. 42(6), pages 1013-30, November.
- Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989.
"Corporate structure, liquidity, and investment: evidence from Japanese industrial groups,"
Finance and Economics Discussion Series
82, Board of Governors of the Federal Reserve System (U.S.).
- Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 33-60, February.
- Ben S. Bernanke & Mark Gertler, 1995.
"Inside the Black Box: The Credit Channel of Monetary Policy Transmission,"
Journal of Economic Perspectives,
American Economic Association, vol. 9(4), pages 27-48, Fall.
- Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
- Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
- Gertler, Mark & Gilchrist, Simon, 1993.
" The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 95(1), pages 43-64.
- Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series 93-5, Board of Governors of the Federal Reserve System (U.S.).
- Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1993. "Nonlinear Dynamic Structures," Econometrica, Econometric Society, vol. 61(4), pages 871-907, July.
- Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamprasad M. Pujar).
If references are entirely missing, you can add them using this form.