Macroeconomic Fluctuations and Bank Lending: Evidence for Germany and the Euro Area

Abstract

Abstract:This paper analyzes how bank lending to the private nonbank sector responds dynamically to aggregate supply, demand and monetary policy shocks in Germany and the euro area. The results suggest that the dynamic responses in the two areas are broadly similar, although there are some differences in the relative contribution of the three shocks to the development of output, prices, interest rates and bank loans over time. In order to assess the role of bank lending in the transmission of macroeconomic shocks, we perform counterfactual simulations and analyze the dynamic responses of German loan sub-aggregates in order to test the distributional implications of potential credit market frictions. The results suggest that there is no evidence that loans amplify the transmission of macroeconomic fluctuations or that a "financial accelerator" via bank lending exists.Keywords: Business cycle fluctuations, bank lending, SVAR model, sign restrictions JEL classification: E32, E44, G21 Non-technical summaryTwo related issues form the starting point of our analysis. The first one is the question why the development of bank credit in Germany has differed so much from that in the euro area in recent years. Contrary to the euro area, there was a slowdown in credit growth in Germany and there is an ongoing discussion about the factors that have led to this marked difference.The other issue is the more general question whether bank loans dampen or amplify the effects of macroeconomic shocks. This latter question is closely related to the empirical literature on the "financial accelerator" which faces the -still unresolved -problem of identifying credit demand and credit supply movements.In order to shed some light on these issues, we analyse how bank lending to the private nonbank sector responds dynamically to macroeconomic shocks in Germany and the euro area. We first estimate the joint dynamic behaviour of real GDP, the price level, the short-term nominal interest rate and the stock of outstanding bank loans using a vector-autoregressive (VAR) model. Based on this model, we identify an aggregate supply shock, a demand shock and a monetary policy shock by imposing short-run sign restrictions on impulse responses.This method has the advantage of being relatively agnostic. It therefore implies a much smaller probability of "creating" certain results by imposing strong a priori restrictions than e.g. long-run or zero restrictions, which are often used in the structural VAR literature. We then assess the patterns of the dynamic responses of economic activity, prices, interest rates and bank lending to the three identified macroeconomic shocks as well as the contribution of the three shocks to fluctuations in output, prices, interest rates and bank lending over time based on historical decompositions.The results suggest that the dynamic response of bank lending to macroeconomic fluctuations in Germany and in the euro area is broadly similar, although there are some differences in the relative contribution of the three shocks ...

Monetary policy and financial (in)stability: An integrated micro–macro approach

“…These differences across banking groups also have implications for the transmission of monetary policy since bank lending reacts differently across these pillars as shown, for example, by Kakes and Sturm (2002) and Eickmeier et al (2006). Financial stability responses are therefore likely to differ across banking sectors, too, and accordingly we also disaggregate our results.…”

Sign restriction approach to macro stress-testing of the Croatian banking system

“…We identify a contractionary monetary policy shock, a negative demand shock and a negative supply shock. The same identifi cation restrictions have been previously proposed by several authors such as: Farrant and Peersman (2005) for the euro area, the United Kingdom, Japan, Canada and the USA; Peersman and Straub (2006) for the USA and euro area; Eickmeier, Hofmann and Worms (2009) for Germany and the euro area; and Dovern, Meier and Vilsmeier (2010) for Germany. Dovern, Meier and Vilsmeier (2010) employ data on German banks' income and loss statements to model the interaction between the banking sector and the macroeconomy.…”

“…The particular choice of the variables is motivated by variable selection in similar studies that use sign restriction approach for macroeconomic stress-testing of the banking sector (Dovern, Meier and Vilsmeier, 2010;Eickmeier, Hofmann and Worms, 2009). We do not employ the exchange rate as an endogenous variable in our study as the changes in the interest rates indirectly refl ect the dynamics of the exchange rate (Hoggarth, Logan and Zicchino, 2005) 6 .…”

“…On the other hand, the aggregate demand shocks have only limited effects while the aggregate supply shocks do not have a signifi cant impact on banking sector indicators. Eickmeier, Hofmann and Worms (2009) analyze how bank lending responds dynamically to aggregate supply, demand and monetary policy shocks in Germany and the eurozone. The analysis is based on a standard VAR model comprising the variables real GDP, the price level and the short-term nominal interest rates.…”

The Real Effects of Loan-To-Value Limits: Empirical Evidence from Korea

“…The central bank reacts to an adverse aggregate supply shock by increasing the interest rate. In the VAR literature, similar restrictions both for aggregate demand and supply shocks were employed by Peersman (2005) Greenwood-Nimmo and Tarassow, 2016;Eickmeier et al, 2009;Duchi and Elbourne, 2016;Bijsterbosch and Falagiarda, 2015;Finlay and Jääskelä, 2014;Peersman, 2005;Hristov et al, 2012;while, Straub and Peersman, 2006;Canova and Paustian, 2011 provided the evidence from DSGE models). The imposed restriction on credit is in line with evidence from DSGE models (e.g., Alpanda andZubairy, 2017 andʹt Veld et al, 2014).…”