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Economic Activity and Credit Market Linkages: New Evidence from Italy

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We investigate the interactions between the business cycle and credit markets in Italy, focusing on how macroeconomic shocks affect the banking sector (i.e. the real effect) and in turn how the financial system’s reaction influences the economic activity (i.e. the feedback effect). We find evidence of both effects, with the former conveyed primarily by the creditworthiness of large firms. Moreover, using data from the Bank Lending Survey provided by the ECB, we disentangle credit supply shocks due to factors inside the banking sector (the bank lending channel), from those outside the banking sector (the borrower’s balance-sheet channel), finding that both types of shocks have a significant impact on the real economy. Our results have far reaching implications for financial stability.

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  • V. Chiorazzo & V. D’Apice & P. Morelli & Giovanni W. Puopolo, 2015. "Economic Activity and Credit Market Linkages: New Evidence from Italy," CSEF Working Papers 413, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:413
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    More about this item

    Keywords

    Real effect; Feedback effect; Bank Lending Channel; Balance-Sheet Channel; VAR; Business Cycle;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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