Uncertainty and credit conditions: Non-linear evidence from firm-level data

Christian Grimme and Steffen Henzel

International Review of Economics & Finance, 2024, vol. 93, issue PA, 1307-1323

Abstract: The financial frictions channel highlights the importance of credit conditions for the transmission of rising uncertainty. Using German firm-level survey data for the period 2003 to 2015, we document that a surge in a firm’s business uncertainty worsens its credit conditions. Particularly, we demonstrate that this effect depends on the level of uncertainty: low uncertainty nearly triples the effect compared to high uncertainty episodes. To provide an interpretation, we consider a process in which a firm’s credit conditions are driven by banks’ expectations about the future level of business uncertainty. Increases in uncertainty serve as a signal to update these expectations. Calibrating such a process using our dataset generates a stronger revision of expectations and a larger deterioration of credit conditions under low uncertainty.

Keywords: Uncertainty; Financial frictions; Credit conditions; Survey data (search for similar items in EconPapers)
JEL-codes: C23 E32 G21 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:93:y:2024:i:pa:p:1307-1323

DOI: 10.1016/j.iref.2024.03.039

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