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The second moments matter: The response of bank lending behavior to macroeconomic uncertainty

  • Christopher F Baum
  • Mustafa Caglayan
  • Neslihan Ozkan

In this paper we investigate whether macroeconomic uncertainty could distort allocation of loanable funds. To provide a road--map for our empirical investigation, we present a simple framework which demonstrates that an increase in macroeconomic uncertainty will lead to more homogeneous behavior among banks. We test this prediction on a comprehensive U.S. commercial bank data set, and find that as macroeconomic uncertainty increases the cross--sectional dispersion of banks' loan--to--asset ratios narrows, supporting our basic hypothesis. Our results are broadly similar across total loans and three major categories of bank loans, and robust to the inclusion of macroeconomic factors

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 172.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:172
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