Changes in the Effects of Bank Lending Shocks and the Development of Public Debt Markets

Sangyup Choi

No 2019rwp-140, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: This paper investigates whether the real effect of bank lending shocks has changed over time by applying a sign-restriction approach. I identify a negative bank lending shock by considering markets for bank loans and public debt (corporate bonds and commercial papers) jointly. Since the real effect of bank lending shocks hinges critically on firms' ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s could change this effect as well. Indeed, I find that firms' enhanced ability to access public debt markets is associated with a decline in the effect of bank lending shocks on output during the Great Moderation. Consistent with the underlying identifying strategy based on the firm's ability to access public debt markets, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.

Keywords: Bank lending shocks; Sign-restriction VARs; Great Moderation; Public debt market; Substitutability between bank loans and bonds (search for similar items in EconPapers)
JEL-codes: E32 E44 G21 (search for similar items in EconPapers)
Pages: 10pages
Date: 2019-01
New Economics Papers: this item is included in nep-fdg and nep-mac
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Journal Article: Changes in the effects of bank lending shocks and development of public debt markets (2020)
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