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The second moments matter: The response of bank lending behaviour to macroeconomic uncertainty

  • Christopher F Baum
  • Mustafa Caglayan
  • Neslihan Ozkan

This paper investigates whether variations in macroeconomic uncertainty distort banks' allocation of loanable funds by affecting the predictability of banks' returns from lending. Low levels of macroeconomic uncertainty will allow bankers to base their lending decisions on more accurate evaluations of different lending opportunities, leading to a more unequal distribution of lending across banks. Contrarily, increased macroeconomic uncertainty will hinder bankers ability to identify and channel funds towards the best opportunities, including more similar lending behaviour across banks. Our empirical analysis provides support for the hypothesis that macroeconomic uncertainty adversely affects the efficient allocation of loanable banks.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2005_27.

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Date of creation: Dec 2005
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Handle: RePEc:gla:glaewp:2005_27
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