Aggregate Uncertainty and the Supply of Credit

Jeanne Verrier and Fabian Valencia
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Jeanne Verrier: Johns Hopkins University
Fabian Valencia: International Monetary Fund

No 514, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We examine empirically how bank lending responds to aggregate uncertainty with the universe of U.S. commercial banks over the period 1984-2010. Identification of supply is achieved by looking at the differential response of banks by how liquid their balance sheets are. We find that increases in uncertainty reduce the supply of credit, but less so for banks with more liquid balance sheets. Our results are robust to a number of tests. We then present a model that rationalizes these results and show that they are consistent with a world in which banks face frictions in raising external finance.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:514

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