Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 27: The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey

Cara Lown and Donald P. Morgan ()
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Donald P. Morgan: Federal Reserve Bank of New York

Abstract: VAR analysis on a measure of bank lending standards collected by the Federal Reserve reveals that shocks to lending standards are significantly correlated with innovations in commercial loans of banks and in real output. Credit standards strongly dominate loan rates in explaining variation in business loans and output. Standards remain significant when we include various proxies for loan demand, suggesting that part of the standards fluctuations can be identified with changes in loan supply. Standards are also significant in structural equations of some categories of inventory investment, a GDP component closely associated with bank lending. The estimated impact of a moderate tightening of standards on inventory investment is of the same order of magnitude as the decline in inventory investment over the typical recession.

Keywords: Credit crunch; Credit rationing; Credit standards; Loan officer survey

JEL-codes: E32; E50; G21

32 pages, September 15, 2004

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