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Bank Lending Shocks and the Euro Area Business Cycle

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  • G. PEERSMAN

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Abstract

I estimate the impact of different types of bank lending shocks on the euro area economy. I first show that the dynamic effects depend on the type of shock. Whereas surges in lending caused by shocks at the supply side of the banking market have a significant positive impact on economic activity and inflation, exactly the opposite is the case for exogenous lending demand shocks. Second, the macroeconomic relevance of bank lending shocks is considerable. Overall, they account for more than half of output variation since the launch of the euro and up to 75 percent of long-run consumer prices variability. The majority of the fluctuations are caused by innovations to lending supply which are orthogonal to monetary policy. A more detailed inspection suggests that these innovations are mainly the result of shocks in the risk-taking appetite of banks triggered by shifts in long-term interest rates or the term spread. Specifically, when long-term government bond yields decline, banks reduce the volume of government loans and securities on their balance sheets whilst increasing the supply of loans to the private sector, which in turn boosts economic activity, inflation and short-run interest rates. Hence, in contrast to conventional wisdom, a falling term spread could predict rising economic activity, which has been the case for some periods within the sample.

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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 11/766.

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Length: 30 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:rug:rugwps:11/766

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Keywords: Bank lending shocks; risk-taking; SVARs;

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References

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  1. den Haan, Wouter J. & Sumner, Steven W. & Yamashiro, Guy M., 2007. "Bank loan portfolios and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 904-924, April.
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  7. Ciccarelli, Matteo & Peydró, José-Luis & Maddaloni, Angela, 2010. "Trusting the bankers: a new look at the credit channel of monetary policy," Working Paper Series 1228, European Central Bank.
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  11. Tobias Adrian & Hyun Song Shin, 2009. "Financial intermediaries and monetary economics," Staff Reports 398, Federal Reserve Bank of New York.
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Cited by:
  1. Sandra Eickmeier & Leonardo Gambacorta & Boris Hofmann, 2013. "Understanding Global Liquidity," BIS Working Papers 402, Bank for International Settlements.
  2. Barnett, Alina & Thomas, Ryland, 2013. "Has weak lending and activity in the United Kingdom been driven by credit supply shocks?," Bank of England working papers 482, Bank of England.
  3. Peersman, G. & Wagner, W.B., 2014. "Shocks to Bank Lending, Risk-Taking, Securitization, and Their Role for U.S. Business Cycle Fluctuations," Discussion Paper 2014-019, Tilburg University, Center for Economic Research.
  4. Darracq Pariès, Matthieu & De Santis, Roberto A., 2013. "A non-standard monetary policy shock: the ECB’s 3-year LTROs and the shift in credit supply," Working Paper Series 1508, European Central Bank.
  5. Nikolaos Antonakakis & Max Breitenlechner & Johann Scharler, 2014. "How Strongly are Business Cycles and Financial Cycles Linked in the G7 Countries?," Working Papers 2014-07, Faculty of Economics and Statistics, University of Innsbruck.

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