The Role of Credit Supply in the Australian Economy
AbstractHistorical 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 Â½ 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.
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 Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2012-02.
Date of creation: May 2012
Date of revision:
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
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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.:
- 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.
- 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.
- Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
- Bo Becker & Victoria Ivashina, 2011. "Cyclicality of Credit Supply: Firm Level Evidence," NBER Working Papers 17392, National Bureau of Economic Research, Inc.
- 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.
- Thomas Helbling & M. Ayhan Kose & Christopher Otrok & Raju Huidrom, 2010.
"Do Credit Shocks Matter? A Global Perspective,"
IMF Working Papers
10/261, International Monetary Fund.
- Mardi Dungey & Adrian Pagan, 2009.
"Extending a SVAR Model of the Australian Economy,"
The Economic Record,
The Economic Society of Australia, vol. 85(268), pages 1-20, 03.
- Roland Meeks, 2009. "Credit market shocks: evidence from corporate spreads and defaults," Working Papers 0906, Federal Reserve Bank of Dallas.
- 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.
- Gianni La Cava, 2013. "Inventory Investment in Australia and the Global Financial Crisis," RBA Research Discussion Papers rdp2013-13, Reserve Bank of Australia.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew).
If references are entirely missing, you can add them using this form.