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Has weak lending and activity in the United Kingdom been driven by credit supply shocks?

  • Barnett, Alina

    ()

    (Bank of England)

  • Thomas, Ryland

    ()

    (Bank of England)

This paper investigates the role of credit demand and supply shocks in driving the weakness in UK banks’ lending and economic activity during both the recent financial crisis and the various UK financial crises since 1966. It uses a structural vector autoregression analysis to identify separate credit demand and supply shocks in addition to the standard macroeconomic shocks that are typically analysed in this framework. It finds that credit supply shocks can account for most of the weakness in bank lending since the onset of the crisis and between a third and a half of the fall in GDP relative to its historic trend. It also finds that credit supply shocks appear to behave more like aggregate supply shocks than aggregate demand shocks because they cause output and inflation to move in opposite directions. This may be because credit supply shocks affect potential supply in the economy or because they have a significant exchange rate effect. The results appear robust to different identifying assumptions. The main sensitivity appears to be when spreads are treated as a non-stationary variable and long-run restrictions are placed on the model.

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Paper provided by Bank of England in its series Bank of England working papers with number 482.

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Length: 45 pages
Date of creation: 20 Dec 2013
Date of revision:
Handle: RePEc:boe:boeewp:0482
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