Has weak lending and activity in the United Kingdom been driven by credit supply shocks?

Alina Barnett and Ryland Thomas

No 482, Bank of England working papers from Bank of England

Abstract: This paper investigates the role of credit demand and supply shocks in driving the weakness in UK banks’ lending and economic activity during both the recent financial crisis and the various UK financial crises since 1966. It uses a structural vector autoregression analysis to identify separate credit demand and supply shocks in addition to the standard macroeconomic shocks that are typically analysed in this framework. It finds that credit supply shocks can account for most of the weakness in bank lending since the onset of the crisis and between a third and a half of the fall in GDP relative to its historic trend. It also finds that credit supply shocks appear to behave more like aggregate supply shocks than aggregate demand shocks because they cause output and inflation to move in opposite directions. This may be because credit supply shocks affect potential supply in the economy or because they have a significant exchange rate effect. The results appear robust to different identifying assumptions. The main sensitivity appears to be when spreads are treated as a non-stationary variable and long-run restrictions are placed on the model.

Keywords: Credit supply shocks; Financial and macro linkages; Bayesian SVARs; sign restrictions; long-run restrictions (search for similar items in EconPapers)
JEL-codes: C11 C32 E51 E52 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-12-20
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0482

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