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The second moments matter: The response of bank lending behaviour to macroeconomic uncertainty

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  • Christopher F Baum
  • Mustafa Caglayan
  • Neslihan Ozkan

Abstract

This paper investigates whether variations in macroeconomic uncertainty distort banks' allocation of loanable funds by affecting the predictability of banks' returns from lending. Low levels of macroeconomic uncertainty will allow bankers to base their lending decisions on more accurate evaluations of different lending opportunities, leading to a more unequal distribution of lending across banks. Contrarily, increased macroeconomic uncertainty will hinder bankers ability to identify and channel funds towards the best opportunities, including more similar lending behaviour across banks. Our empirical analysis provides support for the hypothesis that macroeconomic uncertainty adversely affects the efficient allocation of loanable banks.

Suggested Citation

  • Christopher F Baum & Mustafa Caglayan & Neslihan Ozkan, 2005. "The second moments matter: The response of bank lending behaviour to macroeconomic uncertainty," Working Papers 2005_27, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2005_27
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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