Identifying credit demand, financial intermediation, and supply of funds shocks: A structural VAR approach

Nathan Balke, Zheng Zeng and Ren Zhang

The North American Journal of Economics and Finance, 2021, vol. 56, issue C

Abstract: In this paper, we identify three exogenous shocks to credit market: demand for credit, supply of funds into the financial system, and the willingness to lend of financial institutions (financial intermediation), and also, determine the contribution of these shocks to fluctuations in the credit market and overall economic activity. We estimate a structural vector autoregression model where the three credit shocks are identified with a set of sign restrictions motivated by a simple partial equilibrium model of financial intermediation. We find that the credit demand shock explains significantly the variations in the long-term loan rate proxied by the Moody’s Baa corporate bond yield, while the supply of funds shock contributes to most of the fluctuations in the short-term commercial paper rate. The financial intermediation shock drives most of the fluctuations in the quantity of loans as well as the spread between the Baa and commercial paper rates. Of the credit shocks, we find that the financial intermediation shock has the largest impact on real economic activity. In fact, our analysis implies that the sharp decline in output during the 2007–2009 financial crisis is largely attributable to the financial intermediation shock, along with shocks originating outside of the financial system.

Keywords: Credit shocks; Financial intermediation; Structural VAR (search for similar items in EconPapers)
JEL-codes: C32 E44 E51 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:56:y:2021:i:c:s1062940821000140

DOI: 10.1016/j.najef.2021.101375

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