Research Discussion Papers, Bank of Finland
No 6/1995:
Credit Crunch Caused Investment Slump? An Empirical Analysis Using Finnish Data
Tuomas Saarenheimo ()
Abstract: The objective of this paper is to empirically analyze and
quantify the effect of changes in the supply of bank credit on private
investment. Particular interest is placed on the role of the credit crunch
in explaining the collapse in private investment in the early 1990s. Using
a vector autoregressive econometric model, it is shown that the credit
supply plays a statistically significant and economically important role in
determining investment. The effect of credit on investment comes through
with a lag of about a year and persists for several years. Money supply is
a powerful investment predictor in a bivariate relation, but loses its
significance completely once credit is included in the model. Hence, in the
light of history, it appears that the money supply has had little effect on
investment except as relayed through credit and, to a lesser extent,
through the interest rate. On the other hand, since strong contemporaneous
comovements were found between money and credit, the contemporaneous effect
of money on credit may be considerable. In general, the results were found
to be consistent with the credit view of the monetary transmission
mechanism: monetary policy affects both sides of bank's balance sheets —
money supply and credit supply — and credit seems to be the more important
predictor for investment. It is estimated that positive shocks to the
credit supply during 1986–1988 raised the peak for private investment in
1990 by about FIM 25 billion annually. On the other hand, the subsequent
negative shocks deepened the collapse of investment by approximately FIM 20
billion annually.
Keywords: credit crunch; private investment; (follow links to similar papers)
29 pages, February 6, 1995
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