Bank Lending Shocks and the Euro Area Business Cycle

Gert Peersman ()

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: I estimate the impact of different types of bank lending shocks on the euro area economy. I first show that the dynamic effects depend on the type of shock. Whereas surges in lending caused by shocks at the supply side of the banking market have a significant positive impact on economic activity and inflation, exactly the opposite is the case for exogenous lending demand shocks. Second, the macroeconomic relevance of bank lending shocks is considerable. Overall, they account for more than half of output variation since the launch of the euro and up to 75 percent of long-run consumer prices variability. The majority of the fluctuations are caused by innovations to lending supply which are orthogonal to monetary policy. A more detailed inspection suggests that these innovations are mainly the result of shocks in the risk-taking appetite of banks triggered by shifts in long-term interest rates or the term spread. Specifically, when long-term government bond yields decline, banks reduce the volume of government loans and securities on their balance sheets whilst increasing the supply of loans to the private sector, which in turn boosts economic activity, inflation and short-run interest rates. Hence, in contrast to conventional wisdom, a falling term spread could predict rising economic activity, which has been the case for some periods within the sample.

Keywords: Bank lending shocks; risk-taking; SVARs (search for similar items in EconPapers)
JEL-codes: C32 E30 E44 E51 E52 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011-12
New Economics Papers: this item is included in nep-ban and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (65)

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Related works:
Working Paper: Macroeconomic consequences of different types of credit market disturbances and non-conventional monetary policy in the euro area (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:11/766

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