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Bank Lending and Asset Prices in the Euro Area

Michael Frömmel and Torsten Schmidt

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: We examine the dynamics of bank lending to the private sector for countries of the Euro area by applying a Markov switching error correction model. We identify for Belgium, Germany, Ireland and Portugal stable, mean reverting regimes and unstable regimes with no tendency to return to the long term credit demand equation, whereas for some other countries there is only weak evidence. Furthermore, for these as well as for other countries we detect in the less stable regimes a strong comovement with the development of the stock market. We interpret this as evidence for constraints in bank lending. In contrast, the banks' capital seems to have only marginal impact on the lending behaviour.

Keywords: bank lending; credit demand; Euro area; Markov switching error correction; credit channel; asset prices; credit rationing (search for similar items in EconPapers)
JEL-codes: C32 G21 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2006-07
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fin, nep-fmk, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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