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Lending Standards and the Business Cycle: Evidence from Loan Survey Releases

Lucas Hafemann () and Peter Tillmann ()
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Lucas Hafemann: Justus-Liebig-University Giessen
Peter Tillmann: Justus-Liebig-University Giessen

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: The Fed's Senior Loan Officer Opinion Survey (SLOOS) is widely considered a good indicator of banks' lending conditions. We use the change in corporate bond spreads on SLOOS release days to instrument changes in lending standards. A series of estimated IV local projections shows that lending standards have highly significant effects on macroeconomic and financial variables. A relaxation of standards expands economic activity and eases financial conditions. We then use the change in spreads and the change in the VIX index on release days to identify a pure credit supply shock and a risk-taking shock using sign restrictions in a Bayesian VAR model. We find that an easing in lending has different consequences for both types of shocks. While the VIX, the excess bond premium and stock prices decrease after a pure credit supply shock, they increase after a risk-taking shock.

Keywords: loan survey; credit supply; risk-taking; instrumental variable local projections; shock identification (search for similar items in EconPapers)
JEL-codes: E32 E44 G14 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2021
New Economics Papers: this item is included in nep-fdg, nep-isf and nep-mac
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