Cross-elasticities in credit markets

Stefano Pietrosanti () and Edoardo Rainone ()
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Stefano Pietrosanti: Bank of Italy
Edoardo Rainone: Bank of Italy

No 1029, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We develop a methodology to estimate quantity cross-elasticities in decentralized markets, and apply it to measure the extent of credit reallocation between firms and banks following shocks. Our identification strategy leverages how not all firms borrow from all banks; indirect connections through the credit network thus provide natural exclusion restrictions. Through theory and simulation, we demonstrate the viability of our approach and show that neglecting reallocation leads to an unpredictable bias in treatment and fixed-effects estimates. By applying our estimator to twenty years of data from the Italian credit registry, we find that credit for firms is substitutable in normal times but complementary during recessions, whereas banks' cross-elasticities do not vary with the business cycle. Such evidence is consistent with the asymmetric effects of credit expansions and contractions documented by the empirical banking literature.

Keywords: cross-elasticities; credit markets; shocks propagation; networks; identification (search for similar items in EconPapers)
JEL-codes: C30 G21 L14 (search for similar items in EconPapers)
Date: 2026-06
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_1029_26

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