Dynamic Impact of Credit Risk on the Real Economy in European Countries

Using local projection, this study investigates the dynamic effect of credit risk on the real economy in European countries. We obtain credit spread shocks of nancial and non-nancial institutions in four major eurozone countries by controlling their endogenous changes caused by fear of the global nancial market, the European Central Bank's monetary policy and the anxiety of national government debt. Our rst nding is that industrial production responses to the non-nancial institution credit spread shock are earlier than that for the nancial institution shock. Second, in the case of rising credit risk, Germany, France and Finland increase bank lending to domestic companies. Finally, we nd that these two tendencies were mainly due to the European common factor by verifying the impulse response functions to idiosyncratic credit spread shocks. We conclude that credit risks in each country are largely common in the eurozone.