The macroeconomic impact of financial fragmentation in the euro area: Which role for credit supply?

Martin Bijsterbosch and Matteo Falagiarda

Journal of International Money and Finance, 2015, vol. 54, issue C, 93-115

Abstract: This paper studies the macroeconomic impact of financial fragmentation in the euro area by analysing the role of credit supply shocks during the recent pre-crisis, bust, and post-crisis periods. We estimate a time-varying parameter vector autoregression (TVP-VAR) with stochastic volatility à la Primiceri (2005) for euro area countries, and we identify the structural shocks by imposing sign restrictions on impulse response functions based on the theoretical model by Gerali et al. (2010). The results suggest that credit supply shocks have been an important driver of business cycle fluctuations in euro area countries, and that their effects on the economy have generally increased since the recent crisis. More specifically, we find evidence that credit supply shocks contributed positively to output growth during the pre-crisis period and negatively during the downturn in economic activity in 2008–2009 in all the countries considered. In the post-crisis period, by contrast, we observe a strong rise in cross-country heterogeneity, reflecting financial fragmentation in the euro area associated with the sovereign debt crisis and weaker banks' balance sheets. Although this heterogeneity across euro area countries started to decline around 2012, the contribution of credit supply shocks to GDP growth and credit growth remained negative in most euro area countries in mid-2013 (the end of our sample), suggesting that constraints in the supply of credit continued to weaken economic activity.

Keywords: Credit supply shocks; Euro area; TVP-VAR; Sign restrictions (search for similar items in EconPapers)
JEL-codes: C11 C32 E32 E51 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (68)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560615000285
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:54:y:2015:i:c:p:93-115

DOI: 10.1016/j.jimonfin.2015.02.013

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().