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Macroeconomic uncertainty and banks' lending decisions: The case of Italy

  • Mario Quagliariello

    ()

    (Banca d�Italia)

This paper discusses the role that macroeconomic uncertainty plays in banks� decisions on the optimal asset allocation. Using a portfolio model recently proposed in the literature, the paper aims at disentangling how Italian banks choose between loans and risk-free assets when uncertainty on macroeconomic conditions increases. The econometric results confirm that macroeconomic uncertainty is a significant determinant of banks� investment decisions, also after controlling for other factors. In periods of increasing turmoil, banks� ability to accurately forecast future returns is hindered and herding behaviour tends to emerge, as witnessed by the reduction of the cross-sectional variance of the share of loans held in portfolio.

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File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2007/2007-0615/en_tema_615.pdf
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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 615.

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Date of creation: Feb 2007
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Handle: RePEc:bdi:wptemi:td_615_07
Contact details of provider: Postal: Via Nazionale, 91 - 00184 Roma
Web page: http://www.bancaditalia.it

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  1. Michele Gambera, 2000. "Simple forecasts of bank loan quality in the business cycle," Emerging Issues, Federal Reserve Bank of Chicago, issue Apr.
  2. Oxley, Les & McAleer, Michael, 1993. " Econometric Issues in Macroeconomic Models with Generated Regressors," Journal of Economic Surveys, Wiley Blackwell, vol. 7(1), pages 1-40.
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  8. John Huizinga, 1993. "Inflation uncertainty, relative price uncertainty, and investment in U.S. manufacturing," Proceedings, Federal Reserve Bank of Cleveland, pages 521-557.
  9. Glenn Hoggarth & Andrew Logan & Lea Zicchino, 2005. "Macro stress tests of UK banks," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 392-408 Bank for International Settlements.
  10. Mario Quagliariello, . "Banks' Performance over the Business Cycle: A Panel Analysis on Italian Intermediaries," Discussion Papers 04/17, Department of Economics, University of York.
  11. Selody, Jack, 1993. "Inflation Uncertainty, Relative Price Uncertainty, and Investment in U.S. Manufacturing: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 554-57, August.
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  15. Jean Sepulveda-Umanzor, 2004. "The Relation Between Macroeconomic Uncertainty And The Expected Performance Of the Economy," Econometric Society 2004 Latin American Meetings 304, Econometric Society.
  16. Mario Quagliariello, 2007. "Banks' riskiness over the business cycle: a panel analysis on Italian intermediaries," Applied Financial Economics, Taylor & Francis Journals, vol. 17(2), pages 119-138.
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  23. Serven, Luis, 1998. "Macroeconomic uncertainty and private investment in developing countries - an empirical investigation," Policy Research Working Paper Series 2035, The World Bank.
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