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Changes in the effects of bank lending shocks and development of public debt markets

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  • Choi, Sangyup

Abstract

This paper investigates whether the effect of bank lending shocks has changed over time using a sign-restriction Vector Autoregression approach. To the extent to which the effect of bank lending shocks depends critically on firms’ ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s might have weakened this effect. Indeed, we confirm that the effect of bank lending shocks on output has decreased significantly since the 1980s. Consistent with the financial innovation-based explanation of such reduced effects of bank lending shocks, we find that their effects on corporate bond markets have substantially changed as well. These changes in the substitutability between loans and bonds via financial innovation are key to understanding the reduced effect of bank lending shocks. Supporting our identifying assumptions regarding firms’ ability to access alternative sources of financing, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.

Suggested Citation

  • Choi, Sangyup, 2020. "Changes in the effects of bank lending shocks and development of public debt markets," Finance Research Letters, Elsevier, vol. 33(C).
    • Handle: RePEc:eee:finlet:v:33:y:2020:i:c:s1544612318309449
    DOI: 10.1016/j.frl.2019.06.023
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    More about this item

    Keywords

    Bank lending shocks; Sign-restriction VARs; Great moderation; Public debt market; Loans and bonds;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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