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Assessing the Non-Linear Effects of Credit Market Shocks

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  • Barnichon, Régis
  • Matthes, Christian
  • Ziegenbein, Alexander

Abstract

Can financial market disruptions have non-linear dynamic effects on economic activity? Using a novel econometric technique, we assess whether credit shocks have non-linear effects, notably asymmetry and state-dependence, that have been predicted theoretically but never considered empirically. We obtain two main results. First, negative shocks to credit supply have large and persistent effects on output, but positive shocks have no significant effect. Second, credit supply shocks have larger and more persistent effects in periods of weak economic growth. These findings are consistent with the presence of occasionally binding financial constraints and the recent theoretical predictions of He and Krishnamurthy (2013) and Brunnermeier and Sannikov (2014).

Suggested Citation

  • Barnichon, Régis & Matthes, Christian & Ziegenbein, Alexander, 2016. "Assessing the Non-Linear Effects of Credit Market Shocks," CEPR Discussion Papers 11410, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11410
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    References listed on IDEAS

    as
    1. Regis Barnichon & Christian Matthes, 2014. "Gaussian Mixture Approximations of Impulse Responses and the Nonlinear Effects of Monetary Shocks," Working Paper 16-8, Federal Reserve Bank of Richmond, revised 01 Mar 2014.
    2. Jean Boivin & Marc Giannoni & Dalibor Stevanovic, 2013. "Dynamic effects of credit shocks in a data-rich environment," Staff Reports 615, Federal Reserve Bank of New York, revised 01 Oct 2016.
    3. Helbling, Thomas & Huidrom, Raju & Kose, M. Ayhan & Otrok, Christopher, 2011. "Do credit shocks matter? A global perspective," European Economic Review, Elsevier, vol. 55(3), pages 340-353, April.
    4. Robert E. Hall, 2011. "The High Sensitivity of Economic Activity to Financial Frictions," Economic Journal, Royal Economic Society, vol. 121(552), pages 351-378, May.
    5. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    6. Lucia Foster & Cheryl Grim & John Haltiwanger, 2016. "Reallocation in the Great Recession: Cleansing or Not?," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages 293-331.
    7. Gertler, Mark & Lown, Cara S, 1999. "The Information in the High-Yield Bond Spread for the Business Cycle: Evidence and Some Implications," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 132-150, Autumn.
    8. John V. Duca, 1999. "What credit market indicators tell us," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue qiii, pages 2-13.
    9. Jeremy C. Stein, 2014. "Incorporating Financial Stability Considerations into a Monetary Policy Framework : a speech at the International Research Forum on Monetary Policy, Washington, D.C., March 21, 2014," Speech 796, Board of Governors of the Federal Reserve System (U.S.).
    10. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
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    Cited by:

    1. Ugo Panizza & Charles Wyplosz, 2018. "The Folk Theorem of Decreasing Effectiveness of Monetary Policy: What Do the Data Say?," Russian Journal of Money and Finance, Bank of Russia, vol. 77(1), pages 71-107, March.

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