Finance and Economics Discussion Series (FEDS)

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May 2019

Understanding Bank and Nonbank Credit Cycles: A Structural Exploration

C. Bora Durdu and Molin Zhong

Abstract:

We explore the structural drivers of bank and nonbank credit cycles using an estimated medium-scale macro model that allows for bank and nonbank financial intermediation. We posit economy-wide aggregate and sectoral disturbances to potentially drive bank and nonbank credit growth. We find that sectoral shocks affecting the balance sheets of entrepreneurs who borrow from the financial sector are important for the business cycle frequency fluctuations in bank and nonbank credit growth. Economy-wide entrepreneurial risk shocks gain predominance for explaining the longer-horizon comovement between the two series.

Accessible materials (.zip)

Keywords: Banks, Capital requirements, Credit cycles, DSGE models, Leverage, Nonbanks

DOI: https://doi.org/10.17016/FEDS.2019.031

PDF: Full Paper

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Last Update: January 09, 2020