Changes in Bank Lending Standards and the Macroeconomy: Evidence from Mongolia

This paper examines the macroeconomic effects of credit supply shocks in Mongolia. Using bank credit surveys and a newly constructed indicator of changes in lending standards, adjusted for macroeconomic and bank-specific factors influencing credit demand, we identify the impact of credit supply disruptions on key macroeconomic variables. Our findings reveal that one standard deviation shock to credit supply leads to an initial reduction in total lending growth, output growth, and inflation. Decomposing the shocks into credit supply components we find that shocks to enterprise and household lending also have similar effects on respective lending growth rates. However, household credit supply shocks have a stronger impact on output growth, while enterprise credit supply shocks have a stronger impact on inflation. Variance decomposition analysis suggests that adjusted credit supply shocks purged from demand fluctuations hold significant power in explaining the variability of macroeconomic variables. Overall, our results confirm the importance of credit supply shocks for macroeconomic variables in Mongolia.