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Increasing Business Uncertainty and Credit Conditions in Times of Low and High Uncertainty: Evidence from Firm-Level Survey Data

Christian Grimme () and Steffen Henzel ()

No 8791, CESifo Working Paper Series from CESifo

Abstract: We demonstrate that the impact of increases in uncertainty on bank credit conditions depends on the level of uncertainty. Using firm-level survey data, we document that a surge in business-specific uncertainty is particularly damaging when this uncertainty is low: low levels nearly triple the effect compared to high levels. The result is robust to controlling for recessionary periods. To provide an interpretation, we build and calibrate a stylized model in which bank lending is governed by expectations about the future level of business uncertainty. Increases in uncertainty serve as a signal to update these expectations. The model predicts that expectations are revised more strongly and, thus, lending drops more under low uncertainty.

Keywords: uncertainty; financial frictions; bank lending; survey data (search for similar items in EconPapers)
JEL-codes: C23 E32 G21 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-mac
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