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The Role of Credit Supply in the Australian Economy

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  • David Jacobs

    (Reserve Bank of Australia)

  • Vanessa Rayner

    (Reserve Bank of Australia)

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    Abstract

    Historical experience shows that disruptions in credit markets can have a material impact on activity and inflation. However, it is hard to measure such effects owing to the difficulty in isolating credit supply shocks. This paper employs survey data to identify the impact of credit supply shocks in Australia over the past three decades, using a structural vector autoregression approach. We estimate that a one standard deviation shock to the balance of firms reporting difficulty obtaining finance (a 'credit supply shock') reduces Australian GDP by almost ⅓ per cent after one year and gross national expenditure by nearly ½ per cent. The effect on business credit is larger and more persistent, with credit declining by nearly 1 per cent relative to its baseline after two and a half years. During the global financial crisis, the cumulative impact of credit supply shocks is estimated to have contributed to a reduction in GDP of 1 per cent (in mid 2009). While credit supply shocks had a notable effect on GDP during the global financial crisis, this credit event appears to have been shorter and sharper than that experienced during the period of financial instability in the early 1990s. Consistent with a 'credit channel' of monetary policy transmission, an unexpected tightening of monetary policy results in a significant increase in the balance of firms reporting difficulty obtaining finance. We also find effects consistent with a financial accelerator mechanism, whereby an improvement in balance sheets results in easier credit conditions and higher GDP and business credit. Altogether, these results suggest that credit market developments have been an integral aspect of the business cycle in Australia since financial deregulation in the 1980s.

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    Bibliographic Info

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2012-02.

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    Date of creation: May 2012
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    Handle: RePEc:rba:rbardp:rdp2012-02

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    Related research

    Keywords: credit; credit channel; monetary policy; financial accelerator;

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    References

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    1. Mardi Dungey & Adrian Pagan, 2008. "Extending an SVAR Model of the Australian Economy," NCER Working Paper Series 21, National Centre for Econometric Research.
    2. Virginia Queijo von Heideken, 2009. "How Important are Financial Frictions in the United States and the Euro Area?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(3), pages 567-596, 09.
    3. Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
    4. Helbling, Thomas & Huidrom, Raju & Kose, M. Ayhan & Otrok, Christopher, 2011. "Do credit shocks matter? A global perspective," European Economic Review, Elsevier, vol. 55(3), pages 340-353, April.
    5. Adrian Pagan & Tim Robinson, 2011. "Assessing Some Models of the Impact of Financial Stress upon Business Cycles," RBA Research Discussion Papers rdp2011-04, Reserve Bank of Australia.
    6. Bo Becker & Victoria Ivashina, 2011. "Cyclicality of Credit Supply: Firm Level Evidence," NBER Working Papers 17392, National Bureau of Economic Research, Inc.
    7. Tomoya Suzuki, 2004. "Is the Lending Channel of Monetary Policy Dominant in Australia?," The Economic Record, The Economic Society of Australia, vol. 80(249), pages 145-156, 06.
    8. Roland Meeks, 2009. "Credit market shocks: evidence from corporate spreads and defaults," Working Papers 0906, Federal Reserve Bank of Dallas.
    9. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
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