Is Credit Activity in Euro Area Supply – or Demand – Induced?

  • Silvo DAJČMAN Department of Economic Policy, University of Maribor, Maribor, Slovenia

Abstract

In bank-based financial systems, bank loans are the primary external source of funding for enterprises. During a period of subdued economic and credit activity answer to the question whether credit standards or loan rates is the main instrument of credit distribution are of great economic policy relevance. A closely related question is to what extent banks tighten credit standards, because of changes in factors of the credit standards related to banks characteristics (˝supply-induced˝ tightening), and to what extent as a response to changes in credit standards factors related to the demand for loans (demand-induced˝ tightening). To answer these questions for the euro area, we rely, to a great extent, on the euro area bank lending survey performed by the Eurosystem and propose a new measure of changes in credit standards for business loans that captures only the effect of the supply-induced component of the changes in credit standards. The results indicate that tightened credit standards, of which approximately a half is supply-induced, significantly affect the macroeconomy, whereas the price of the loans does not. In order to revive the credit activity in the euro area, simply lowering the policy interest rates will not suffice. We list some measures that could spur this process.

References

[1] Bagliano, C.F., Favero, C.A. 1998. Measuring monetary policy with VAR models: an evaluation. European Economic Review, 42(6): 1069-1112.
[2] Bassett, F.W., Chosak, M.B., Driscoll, J.C., Zakrajsek, E. 2012. Changes in bank lending standards and the macroeconomy. Federal Reserve Board Finance and Economics Discussion Series paper No. 2012-24.
[3] Berg, J., van Rixtel, A., Ferrando, A., de Bondt G., Scopel, S. 2005. The bank lending survey for the Euro area. Occasional Paper, European Central Bank, Frankfurt.
[4] Bernanke, B.S., Mihov, I. 1995. Measuring monetary policy. NBER working paper no. 5764.
[5] Blaes, B. 2011. Bank-related loan supply factors during the crisis: an analysis based on the German bank lending survey. Deutsche Bundesbank Discussion Paper Series 1: Economic Studies No. 31/2011.
[6] Boivin, J., Kley M.T., Mishkin, F.S. 2010. How has the monetary transmission mechanism evolved over time? NBER working paper No. 15879.
[7] Borio, C., Zhu, H. 2008. Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism? Bank for international settlements working papers, No. 268.
[8] Bruno, S.F.G. 2005. Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models. Economics Letters, 87(3): 361-366.
[9] Busch, U., Scharnagl, M., Scheithauer, J. 2010. Loan Supply in Germany During the Financial Crisis. Discussion Paper Series 1 05/2010, Deutsche Bundesbank.
[10] Cappiello, L., Kadareja, A., Sørensen, C.K., Protopapa, M. 2010. Do Bank Loans and Credit Standards have an Effect on Output? A Panel Approach for the Euro Area. ECB Working Paper No. 1150.
[11] Chernick, M.R. 1999. Bootstrap Methods: A Practitioner’s Guide. New York, NY: John Wiley and Sns, Inc.
[12] Christiano, L.J., Eichenbaum, M., Evans, C.L. 1996. The effects of monetary policy shocks: Evidence from the flow of funds. Review of Economics and Statistics, 78(1): 16-34.
[13] Clements, B., Kontolemis, Z.G., Levy, J. 2001. Monetary policy under EMU: differences in the transmission mechanism?. IMF working paper WP/01/102.
[14] Ciccarelli, M., Maddaloni, A., Peydro, J.L. 2010. Trusting the bankers. A new look at the credit channel of monetary policy. ECB working paper series, No. 1228.
[15] Ciccarelli, M., Maddaloni, A., Peydró, J.L. 2013. Heterogenous tranmission mechanism, Monetary policy and financial fragility in the euro area. ECB working paper no. 1527.
[16] Dajcman, S. 2016. The Bank Lending Channel of Monetary Policy and its Macroeconomic Effects: Evidence from a Sample of Selected Euro Area Countries. Inzinerine Ekonomika-Engineering Economics, 2016, 27(2), 124–133.
[17] Dajcman, S. 2017. Bank Risk Aversion and the Risk-Taking Channel of Monetary Policy in the Euro Area. Panoeconomicus, 64(5): 607-621.
[18] Dajcman, S., Tica, J. 2017. The broad credit and bank capital channels of monetary policy transmission in the core and peripheral Euro Area. Zbornik radova Ekonomskog fakulteta u Rijeci: časopis za ekonomsku teoriju i praksu, 35(2):249-275.
[19] De Bondt, G., Maddaloni, A., Peydró, J.L., Scopel, S. 2010). The euro area bank lending survey matters. Empirical evidence for credit and output growth. ECB working paper series No. 1160.
[20] Efron, B., Tibshirani, R.J. 1993. An Introduction to the Bootstrap. New York, NY: Chapman and Hall.
[21] Hempell, H.S., Köhler-Ulbrich, P. Sauer, S. 2009. Information from the Euro area bank lending survey. ECB Occasional Paper.
[22] Hempell, H.S., Sørensen, K. 2010. The impact of supply constraints on bank lending in the euro area – crisis induced crunching? ECB working paper series, No. 1262.
[23] Juessen, F., Linnemann, L. 2010. Estimating panel VARs from macroeconomic data: Some Mone Carlo evidence and an application to OECS public spending shocks. SFB Dicussion Paper No. 24/2010.
[24] Keeton, W.R. 1979. Equilibrium Credit Rationing. New York: Garland, 1979.
[25] Lown, C.S., Morgan, D., and Rohatgi, S. 2000. Listening to Loan Officers: The Impact of Commercial Credit Standards on Lending and Output. Federal Reserve Bank of New York Economic Policy Review, 6(2): 1–16.
[26] Lown, C.S., Morgan, D.P. 2006. The credit cycle and the business cycle: new findings from the Loan officer opinion survey. Journal of Money, Credit, and Banking, 38(6): 1575-1597.
[27] Maddaloni, A., Peydró, JL. 2012. The low monetary rates paradox, banking stability and credit: evidence from the euro area. Paper presented at the 12th Jacques Polak Annual Research Conference at the International Monetary Fund, Washington, D.C., November 10–11.
[28] Maddaloni, A., Peydró, JL. 2011. Bank risk-taking, securitization, supervision and low interest rates: evidence from US and euro area lending standards. Review of Financial Studies, 24(6): 2121-2165.
[29] Nickell, J.S. 1981. Biases in Dynamic Models with Fixed Effects. Econometrica, 49(6): 1417-26.
[30] Peek, J., Rosengren, E.S. 2013. The role of banks in the transmission of monetary policy. Federal Reserve Bank of Boston Public policy discussion papers, No. 13-5.
[31] Pesaran, M., Zhao, Z. 1999. Bias reduction in estimating long-run relationships from dynamic heterogeneous panels. In Analysis of panels and limited dependent variable models, (ed. by C. Hsiao, K. Lahiri, L. Lee, and M. Pesaran), chap. 12: 297-322. Cambridge University Press.
[32] Praet, P. 2014. Current issues in monetary policy. Speech by Peter Praet, Member of the Executive Board of the ECB, at the Peterson Institute for International Economics in Washington, DC, 9 December 2014.
[33] Stiglitz, J.E., Weiss, A. 1981. Credit Rationing in Markets in Imperfect Information. American Economic Review, 71(3): 393–410.
Published
2018-12-10
How to Cite
DAJČMAN, Silvo. Is Credit Activity in Euro Area Supply – or Demand – Induced?. Journal of Advanced Research in Law and Economics, [S.l.], v. 9, n. 2, p. 452-462, dec. 2018. ISSN 2068-696X. Available at: <https://journals.aserspublishing.eu/jarle/article/view/2465>. Date accessed: 29 mar. 2024. doi: https://doi.org/10.14505//jarle.v9 2(32).09.