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Aggregate Uncertainty and the Supply of Credit

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  • Fabian Valencia

Abstract

Recent studies show that uncertainty shocks have quantitatively important effects on the real economy. This paper examines one particular channel at work: the supply of credit. It presents a model in which a bank, even if managed by risk-neutral shareholders and subject to limited liability, can exhibit self-insurance, and thus loan supply contracts when uncertainty increases. This prediction is tested with the universe of U.S. commercial banks over the period 1984-2010. Identification of credit supply is achieved by looking at the differential response of banks according to their level of capitalization. Consistent with the theoretical predictions, increases in uncertainty reduce the supply of credit, more so for banks with lower levels of capitalization. These results are weaker for large banks, and are robust to controlling for the lending and capital channels of monetary policy, to different measures of uncertainty, and to breaking the dataset in subsamples. Quantitatively, uncertainty shocks are almost as important as monetary policy ones with regards to the effects on the supply of credit.

Suggested Citation

  • Fabian Valencia, 2013. "Aggregate Uncertainty and the Supply of Credit," IMF Working Papers 13/241, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/241
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    Cited by:

    1. Jannsen, Nils & Potjagailo, Galina & Wolters, Maik H., 2015. "Monetary policy during financial crises: Is the transmission mechanism impaired?," Kiel Working Papers 2005, Kiel Institute for the World Economy (IfW).
    2. Laurent Ferrara & Pierre Guérin, 2015. "What Are The Macroeconomic Effects of High-Frequency Uncertainty Shocks?," EconomiX Working Papers 2015-12, University of Paris Nanterre, EconomiX.
    3. Grimme, Christian, 2017. "Uncertainty and the Cost of Bank vs. Bond Finance," MPRA Paper 79852, University Library of Munich, Germany.
    4. Valencia, Fabián, 2014. "Banks' Precautionary Capital And Credit Crunches," Macroeconomic Dynamics, Cambridge University Press, vol. 18(08), pages 1726-1750, December.
    5. Sophia Chen, 2015. "Uncertainty and Investment; The Financial Intermediary Balance Sheet Channel," IMF Working Papers 15/65, International Monetary Fund.

    More about this item

    Keywords

    United States; Credit Cycles; Credit Crunch; Uncertainty; Self-insurance; real gdp; bank capital; gdp growth; bank capitalization; bank size; General; Financial Markets and the Macroeconomy;

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