Bank Lending Standards, Loan Demand, and the Macroeconomy: Evidence from the Korean Bank Loan Officer Survey

A typical sign-restriction approach imposes restrictions on the bank lending rate (price) and the volume of loans (quantity) to identify a loan supply shock under the implicit assumption that the observed interest rate equates supply and demand for loans. Using the bank loan officer surveys from 12 countries, we document a novel cyclical pattern found in bank lending standards and loan demand, which differs between market-based and bank-based economies. In particular, the lending rate does not necessarily reflect the credit market conditions in bank-based economies, suggesting the presence of excess demand for credit. Using the Korean economy as an example, we demonstrate the failure of identification of loan supply shocks when relying on the lending rate and propose novel identifying schemes by exploiting the information from the bank loan officer survey. Our findings suggest that disentangling the supply and demand factors of credit shocks is crucial in understanding their macroeconomic effects.