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From Subprime Loans to Subprime Growth? Evidence for the Euro Area

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  • Martin Cihak
  • Petya Koeva Brooks

Abstract

The global financial crisis has highlighted the potential of financial conditions for influencing real economic activity. We examine the linkages between the financial and real sectors in the euro area, finding that (i) bank loan supply responds negatively to declines in bank soundness; (ii) a cutback in bank loan supply has a negative impact on economic activity; (iii) a positive shock to the corporate bond spread lowers industrial output; and (iv) risk indicators for the banking, corporate, and public sectors show an improvement beginning in 2002–03, followed by a major deterioration since 2007. These estimates imply that the currently estimated bank losses would subtract some 2 percentage points from the euro area output (but with considerable uncertainty around the estimates).

Suggested Citation

  • Martin Cihak & Petya Koeva Brooks, 2009. "From Subprime Loans to Subprime Growth? Evidence for the Euro Area," IMF Working Papers 09/69, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:09/69
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    References listed on IDEAS

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    Cited by:

    1. Fabio C. Bagliano & Claudio Morana, 2012. "Macro-Finance Interactions in the US: A Global Perspective," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    2. Saldías, Martín, 2013. "Systemic risk analysis using forward-looking Distance-to-Default series," Journal of Financial Stability, Elsevier, vol. 9(4), pages 498-517.
    3. Luisa Carpinelli, 2009. "Real effects of banking crises: a survey of the literature," Questioni di Economia e Finanza (Occasional Papers) 55, Bank of Italy, Economic Research and International Relations Area.
    4. Jan Babecky & Lubos Komarek & Zlatuse Komarkova, 2013. "Financial Integration at Times of Financial Instability," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(1), pages 25-45, March.
    5. International Monetary Fund, 2010. "Kingdom of the Netherlands; Netherlands: 2009 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Direct," IMF Staff Country Reports 10/34, International Monetary Fund.

    More about this item

    Keywords

    Banking; Credit risk; Demand for money; Economic models; Euro Area; Financial sector; Financial risk; Interest rates; Real sector; linkages; contingent claims approach; bond; bank lending; corporate bond; bank loan;

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