The role of credit supply shocks in pacific alliance countries: A TVP-VAR-SV approach

Carlos Guevara and Gabriel Rodríguez

The North American Journal of Economics and Finance, 2020, vol. 52, issue C

Abstract: This paper analyzes the effect of loan supply shocks on the real economic activity of Pacific Alliance countries using a Time-Varying Parameter VAR with Stochastic Volatility (TVP-VAR-SV) model which is identified by sign restrictions. Two main results arise from the analysis. First, loan supply shocks have an important impact on real economic activity in all Pacific Alliance countries: about 1% in Colombia, Mexico, and Peru, and about 0.5% in Chile. Thus, its contribution to business cycle fluctuations is similar to that of aggregate supply shocks and aggregate demand shocks in both stability and slowdown periods. Second, the power of loan supply shocks to affect economic activity do not remain constant over the time and its evolution across periods is heterogeneous among all Pacific Alliance countries. The sensitivity analysis indicates that the results of the model are robust to different priors specifications and to multiple sets of sign restrictions.

Keywords: Loan supply shocks; Time-varying parameter VAR with stochastic volatility; Sign restrictions; Impulse-response function; Historical decomposition; Business cycles; Pacific alliance bloc; Chile; Peru; Mexico; Colombia; C32; E32; E51 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:52:y:2020:i:c:s1062940819304656

DOI: 10.1016/j.najef.2019.101140

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