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The Role of Credit Supply in the Australian Economy

Author

Listed:
  • David Jacobs

    (Reserve Bank of Australia)

  • Vanessa Rayner

    (Reserve Bank of Australia)

Abstract

Historical experience shows that disruptions in credit markets can have a material impact on activity and inflation. However, it is hard to measure such effects owing to the difficulty in isolating credit supply shocks. This paper employs survey data to identify the impact of credit supply shocks in Australia over the past three decades, using a structural vector autoregression approach. We estimate that a one standard deviation shock to the balance of firms reporting difficulty obtaining finance (a 'credit supply shock') reduces Australian GDP by almost ⅓ per cent after one year and gross national expenditure by nearly ½ per cent. The effect on business credit is larger and more persistent, with credit declining by nearly 1 per cent relative to its baseline after two and a half years. During the global financial crisis, the cumulative impact of credit supply shocks is estimated to have contributed to a reduction in GDP of 1 per cent (in mid 2009). While credit supply shocks had a notable effect on GDP during the global financial crisis, this credit event appears to have been shorter and sharper than that experienced during the period of financial instability in the early 1990s. Consistent with a 'credit channel' of monetary policy transmission, an unexpected tightening of monetary policy results in a significant increase in the balance of firms reporting difficulty obtaining finance. We also find effects consistent with a financial accelerator mechanism, whereby an improvement in balance sheets results in easier credit conditions and higher GDP and business credit. Altogether, these results suggest that credit market developments have been an integral aspect of the business cycle in Australia since financial deregulation in the 1980s.

Suggested Citation

  • David Jacobs & Vanessa Rayner, 2012. "The Role of Credit Supply in the Australian Economy," RBA Research Discussion Papers rdp2012-02, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2012-02
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    File URL: http://www.rba.gov.au/publications/rdp/2012/pdf/rdp2012-02.pdf
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    References listed on IDEAS

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    1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    2. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    3. Helbling, Thomas & Huidrom, Raju & Kose, M. Ayhan & Otrok, Christopher, 2011. "Do credit shocks matter? A global perspective," European Economic Review, Elsevier, vol. 55(3), pages 340-353, April.
    4. Roland Meeks, 2009. "Credit market shocks: evidence from corporate spreads and defaults," Working Papers 0906, Federal Reserve Bank of Dallas.
    5. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
    6. Becker, Bo & Ivashina, Victoria, 2014. "Cyclicality of credit supply: Firm level evidence," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 76-93.
    7. Mardi Dungey & Adrian Pagan, 2009. "Extending a SVAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 85(268), pages 1-20, March.
    8. Virginia Queijo von Heideken, 2009. "How Important are Financial Frictions in the United States and the Euro Area?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(3), pages 567-596, September.
    9. Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
    10. Adrian Pagan & Tim Robinson, 2011. "Assessing Some Models of the Impact of Financial Stress upon Business Cycles," RBA Research Discussion Papers rdp2011-04, Reserve Bank of Australia.
    11. Tomoya Suzuki, 2004. "Is the Lending Channel of Monetary Policy Dominant in Australia?," The Economic Record, The Economic Society of Australia, vol. 80(249), pages 145-156, June.
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    Cited by:

    1. Knop, Stephen J. & Vespignani, Joaquin L., 2014. "The sectorial impact of commodity price shocks in Australia," Economic Modelling, Elsevier, vol. 42(C), pages 257-271.
    2. James Bishop & Peter Tulip, 2017. "Anticipatory Monetary Policy and the 'Price Puzzle'," RBA Research Discussion Papers rdp2017-02, Reserve Bank of Australia.
    3. Tng Boon Hwa & Mala Raghavan & Teh Tian Huey, 2017. "Macro-financial effects of portfolio flows: Malaysia’s experience," CAMA Working Papers 2017-35, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Gianni La Cava, 2013. "Inventory Investment in Australia and the Global Financial Crisis," RBA Research Discussion Papers rdp2013-13, Reserve Bank of Australia.

    More about this item

    Keywords

    credit; credit channel; monetary policy; financial accelerator;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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