Bank Lending Standards, Loan Demand, and the Macroeconomy: Evidence from the Emerging Market Bank Loan Officer Survey

Despite renewed interest spurred by the global financial crisis, identifying a bank loan supply shock from demand-side factors remains challenging. While existing sigh-restriction studies often rely on the bank lending rate and the loan volume to identify a loan supply shock, they implicitly assume that the observed interest rate always equates supply and demand for loans. Using bank loan officer survey from eight emerging market economies (EMEs), I document a distinct cyclical pattern of bank lending standards and loan demand in the EMEs from that in the U.S. or the Euro area. Using quarterly Korean data, I demonstrate that a conventional sign-restriction approach could result in a misguided interpretation of credit slowdown when credit rationing or non-price lending terms exist. To resolve this issue, I propose an alternative identifying scheme by exploiting the information from bank loan officer survey and find that a negative loan supply shock has a strong adverse effect on output, followed by a decline in inflation and the policy rate.