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Credit Supply and Demand and the Australian Economy

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  • Adrian Blundell-Wignall

    (Reserve Bank of Australia)

  • Marianne Gizycki

    (Reserve Bank of Australia)

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    Abstract

    The paper explores the lending behaviour of financial intermediaries over the business cycle in the light of new theories emphasising agency costs. During a “credit crunch” loans from financial intermediaries are unobtainable at any price, so that credit may have a “causal” role in influencing economic outcomes in the short run. Tests of this phenomenon show that it is not supported by the Australian data. However, while credit may not “cause” economic activity it may, nevertheless, have useful leading indicator properties. This is because the demand for credit is based on expectations about future demand as well as the current cost of credit. Indeed, monetary policy operates in part via intertemporal substitution in demand, which is reflected in, though not caused by, the behaviour of credit. These properties of credit are shown to be broadly consistent with Australian data.

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    File URL: http://www.rba.gov.au/publications/rdp/1992/pdf/rdp9208.pdf
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    Bibliographic Info

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9208.

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    Date of creation: Jul 1992
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    Handle: RePEc:rba:rbardp:rdp9208

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    1. Townsend, Robert M., 1988. "Information constrained insurance : The revelation principle extended," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 411-450.
    2. King, Stephen R, 1986. "Monetary Transmission: Through Bank Loans or Bank Liabilities?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(3), pages 290-303, August.
    3. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    4. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
    5. Paul Francis O'Brien & Frank Browne, 1992. "A "Credit Crunch"?: The Recent Slowdown in Bank Lending and Its Implications for Monetary Policy," OECD Economics Department Working Papers 107, OECD Publishing.
    6. 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.
    7. 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.
    8. Laffont, Jean-Jacques & Garcia, Rene, 1977. "Disequilibrium Econometrics for Business Loans," Econometrica, Econometric Society, vol. 45(5), pages 1187-1204, July.
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