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Changes in the Effects of Bank Lending Shocks and the Development of Public Debt Markets

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  • Sangyup Choi

    (Yonsei University)

Abstract

This paper investigates whether the real effect of bank lending shocks has changed over time by applying a sign-restriction approach. I identify a negative bank lending shock by considering markets for bank loans and public debt (corporate bonds and commercial papers) jointly. Since the real effect of bank lending shocks hinges critically on firms' ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s could change this effect as well. Indeed, I find that firms' enhanced ability to access public debt markets is associated with a decline in the effect of bank lending shocks on output during the Great Moderation. Consistent with the underlying identifying strategy based on the firm's ability to access public debt markets, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.

Suggested Citation

  • Sangyup Choi, 2019. "Changes in the Effects of Bank Lending Shocks and the Development of Public Debt Markets," Working papers 2019rwp-140, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2019rwp-140
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    More about this item

    Keywords

    Bank lending shocks; Sign-restriction VARs; Great Moderation; Public debt market; Substitutability between bank loans and bonds;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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