Credit Supply or Demand? The Changing Role of Structural Market Forces in Bank Lending

Patrik Kupkovic

No WP 6/2023, Working and Discussion Papers from Research Department, National Bank of Slovakia

Abstract: The Global Financial Crisis, the European Debt Crisis, and the recent COVID-19 Crisis have repeatedly demonstrated that disruptions in credit markets can have serious macroeconomic consequences. This paper aims to assess the structural drivers of the NFCs bank lending market, as bank lending dominates the credit markets in the euro area, and to determine its macroeconomic consequences. To study these effects, we use structural VAR methodology with a modified identification scheme and modified variable selection compared to what is usually found in the literature. As an empirical illustration, we analyze the importance of the bank lending market in a small, open and bank-based euro area economy - Slovakia. The results show that loan demand shocks (loans demanded by firms) are at least as important as credit supply shocks (loans supplied by banks) in the lending market and that this importance changes over the cycle. These findings have important policy implications, as responding to these shocks may require different policy measures. Contributions to the literature are (i) new empirical evidence on the macroeconomic importance of loan demand shocks compared to credit supply shocks and (ii) new country-specific modification of structural VAR methodology.

JEL-codes: C32 E51 G01 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2023-06
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:svk:wpaper:1098

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