The role of sentiment in the provision of credit

Björn O. Meyer

No 466, Kiel Advanced Studies Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The provision of credit has been shown to be eminent for macroeconomic activity. Recent research highlighted that optimism may play a role in the provision of credit through leverage cycles. A decomposition of corporate bond spreads allows the modelling of a propensity-to-lend through an excess bond premium. In the US economy, optimism in various sentiment measures causes within a VAR model, including other financial market variables, a fall of this excess bond premium and therefore increase the propensity-to-lend. Use of the Michigan Consumer Sentiment Index and animal spirit indices show a variation of information content in sentiment and different types of animal spirits. The overall reaction to positive animal spirits seems to be dominated by a positive response of the credit provision and its subsequent reversal, while an increase in the MCSI causes a more persistent positive response.

JEL-codes: E03 E22 E32 E44 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwasw:466

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