William F. Bassett, Mary Beth Chosak, John C. Driscoll, and Egon Zakrajsek
Abstract: Identifying the macroeconomic effects of credit supply disruptions is difficult because many of the same factors that influence the supply of bank loans can also affect the demand for credit. Using bank-level responses to the Federal Reserve's Senior Loan Officer Opinion Survey, we decompose the reported changes in lending standards--a commonly-used indicator of changes in credit supply conditions--into a component that captures the change in banks' lending posture in response to bank-specific and macroeconomic factors that also affect loan demand and a residual component, which provides a cleaner measure of fluctuations in the effective supply of bank-intermediated credit. When included in a standard VAR framework, shocks to our measure of loan supply are associated with substantial declines in output and in the capacity of businesses and households to borrow from the banking sector, as well as with a sharp widening of credit spreads and a significant easing of monetary policy. We corroborate the interpretation of our series as movements in the supply of bank loans using a detailed loan-level data set: A regression of individual loan amounts on the corresponding interest rate spreads--where the latter is instrumented with our bank-level loan-supply shifter--yields the semi-elasticity of loan demand between −1.0 and −1.5.
Keywords: Credit supply shocks, bank credit policies, financial acceleratorFull paper (459 KB PDF) | Full paper (Screen Reader Version)