Credit supply shocks and the global financial crisis in three small open economies

Finlay, Richard; Jääskelä, Jarkko

doi:10.1016/j.jmacro.2014.01.006

“…In order to analyze the recent crisis, we also present the historical decomposition between 2007Q1 and 2014Q4. In line with other studies (Barnett and Thomas, 2014;Finlay and Jääskelä, 2014), Figure 7 shows supply shocks were dragging down GDP growth in the period immediately preceding and during the crisis, their effect in the last two years is positive, which probably reflects the lack of global and domestic inflationary pressures.…”

Section: Baseline Resultssupporting

confidence: 90%

“…Regarding the euro area, Hristov, Hülsewig and Wollmershäuser (2012) find that loan supply shocks have had a strong effect on lending and GDP growth during the financial crisis, with some cross-country heterogeneity regarding the timing and the magnitude of the shocks. Studies on Hungary (Tamási and Világi, 2011) and on Australia, Canada and the UK (Finlay and Jääskelä, 2014), also find that the role of loan supply shocks in the recent crisis was important, although it was not dominant. This paper analyzes the effects of loan supply shocks in Macedonia between 1998 and 2014, as well as the effects of other key macroeconomic shocks, i.e., 1 The views expressed in this paper are those of the authors and do not necessarily represent the views of the National Bank of the Republic of Macedonia.…”

Section: Introductionmentioning

confidence: 99%

Loan Supply Shocks in Macedonia: A Bayesian SVAR Approach with Sign Restrictions

Kabashi

¹

,

Suleva

²

2016

CES

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This paper analyzes the effects of loan supply, as well as aggregate demand, aggregate supply and monetary policy shocks between 1998 and 2014 in Macedonia using a structural vector autoregression model with sign restrictions and Bayesian estimation. The main results indicate that loan supply shocks have no significant effect on loan volumes and lending rates, or on economic activity and prices. The effects of monetary policy on lending activity are fairly limited, although there is some evidence that it affects lending rates more than loan volumes. Monetary policy shocks have strong effects on inflation, while the central bank reacts strongly to adverse shocks hitting the economy. Baseline results are confirmed by several robustness checks. According to historical decomposition, the lending activity was supporting economic growth before and during the crisis, but its contribution became negative during the recovery and it was a drag on growth until the end of the period. Pre-crisis GDP growth is mostly explained by supportive monetary policy. However, the restrictive monetary policy during the crisis contributed to the fall of GDP, before becoming supportive again during the early stages of the recovery. Policy rates in recent years mostly reflect subdued lending activity and aggregate supply factors, which the central bank tries to counteract with a more accommodative policy. monetary policy, aggregate demand and aggregate supply shocks. It follows the recent literature on loan supply shocks, particularly regarding the empirical methodology. The main contribution of the paper is that it focuses on an important economic and policy issue in Macedonia, which has not been previously empirically investigated. By using Bayesian SVAR with sign restrictions, the paper avoids some of the drawbacks of classical econometric methods arising from the relatively short data series with structural and methodological breaks, which is common for transition countries. To the best of our knowledge, this is the first paper which tries to apply this technique to economic data on Macedonia.The paper starts with discussing data and methodology in Section 2. Section 3 presents baseline results. Section 4 provides robustness checks. The last section provides a conclusion.

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“…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).…”

Section: Insert Tables 1a and 1b Herementioning

confidence: 98%

“…Recall that the baseline results impose one of the identifying sign restrictions that the central bank reacts to an adverse aggregate supply shock by increasing the interest rate (e.g., Hristov et al, (2012). However, some other VAR-based studies have left unrestricted the response of the central bank to an aggregate supply shock (for example, Eickmeier et al, 2009;Duchi and Elbourne, 2016;Bijsterbosch and Falagiarda, 2015;Finlay and Jääskelä, 2014). In this sub-section, we check the sensitivity of our baseline results by considering this alternative restriction.…”

Section: Consider An Alternative Identification Restrictionmentioning

confidence: 99%

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

Pontines¹

2020

SSRN Journal

1

0

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This study adds to a recent and growing literature that assesses the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation targeting economy and an active user of loan-to-value limits. We identify shocks using sign-restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects on different measures of credit, i.e., real bank credit, real total credit and real household credit. We also find that both shocks have non-negligible effects on real house prices, including effects on real output, real consumption and real investment. We do, however, find that loan-to-value ratio shocks have negligible effects on the price level. These findings indicate that for the period covered by this study, limits on loan-to-value achieved their financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-tovalue have important aggregate consequences despite it being a sectoral, targeted policy instrument. AbstractThis study adds to a recent and growing literature that assesses the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation targeting economy and an active user of loan-tovalue limits. We identify shocks using sign-restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects on different measures of credit, i.e., real bank credit, real total credit and real household credit. We also find that both shocks have non-negligible effects on real house prices, including effects on real output, real consumption and real investment. We do, however, find that loan-to-value ratio shocks have negligible effects on the price level. These findings indicate that for the period covered by this study, limits on loan-to-value achieved their financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-to-value have important aggregate consequences despite it being a sectoral, targeted policy instrument.JEL Codes: E31, E32, E52, E58, G28

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The real effects of loan-to-value limits: empirical evidence from Korea

Pontines

¹

2020

View full text Add to dashboard Cite

This study adds to a recent and growing literature that assesses the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation targeting economy and an active user of loan-to-value limits. We identify shocks using sign-restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects on different measures of credit, i.e., real bank credit, real total credit and real household credit. We also find that both shocks have non-negligible effects on real house prices, including effects on real output, real consumption and real investment. We do, however, find that loan-to-value ratio shocks have negligible effects on the price level. These findings indicate that for the period covered by this study, limits on loan-to-value achieved their financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-tovalue have important aggregate consequences despite it being a sectoral, targeted policy instrument.

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Credit supply shocks and the global financial crisis in three small open economies

Cited by 18 publications

References 14 publications

Loan Supply Shocks in Macedonia: A Bayesian SVAR Approach with Sign Restrictions

Loan Supply Shocks in Macedonia: A Bayesian SVAR Approach with Sign Restrictions

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

The real effects of loan-to-value limits: empirical evidence from Korea

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