International liquidity shocks and domestic loan supply in the euro area

Lina Zwick

No 564, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: After two decades of increased financial market integration, particularly driven by the banking sector, during the recent financial crisis capital flows decreased sharply, and especially banking flows were affected. At the same time loan volume in Euro Area countries slowed down, evoking concerns that domestic banks might have restricted their domestic lending activities due to international liquidity shortages. To probe this explanation, this paper analyzes the macroeconomic effects of adverse international liquidity shocks for eleven Euro Area countries between 2003 and 2013 on a quarterly basis. The international liquidity shocks are identified by applying a panel vector autoregressive (VAR) model with sign restrictions. The analysis reveals no significant decline in loan volume after such a shock. Rather, domestic banks presumably react by withdrawing money from abroad, thereby buffering the impact of the sharp decrease of capital inflows on the domestic economy.

Keywords: international capital flows; Panel VAR; loan supply restrictions; home bias (search for similar items in EconPapers)
JEL-codes: F32 F34 G21 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-eec, nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:564

DOI: 10.4419/86788650

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