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The Impact of Credit Market Sentiment Shocks - A TVAR Approach

Maximilian Böck and Thomas O. Zörner ()
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Thomas O. Zörner: Department of Economics, Vienna University of Economics and Business

Authors registered in the RePEc Author Service: Thomas O. Zoerner

Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics

Abstract: This paper investigates the role of credit market sentiments and investor beliefs on credit cycle dynamics and their propagation to business cycle fluctuations. Using US data from 1968 to 2019, we show that credit market sentiments are indeed able to detect asymmetries in a small-scale macroeconomic model. By exploiting recent developments in behavioral finance on expectation formation in financial markets, we are able to identify an unexpected credit market news shock exhibiting different impacts in an optimistic and pessimistic credit market environment. While an unexpected movement in the optimistic regime leads to a rather low to muted impact on output and credit, we find a significant and persistent negative impact on those variables in the pessimistic regime. Therefore, this article departs from the current literature on the role of financial frictions for explaining business cycle behavior in macroeconomics and argues in line with recent theoretical contributions on the relevance of expectation formation and beliefs as source of cyclicity and instability in financial markets.

Keywords: Credit cycles; Belief formation; Threshold VARs (search for similar items in EconPapers)
JEL-codes: C34 E32 E44 E71 G41 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-mac
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