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Loan Supply Shocks, Prudential Regulation, and the Business Cycle

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  • Paul Rudel

    (Deutsche Bundesbank)

Abstract

How do the business cycle effects of loan supply shocks depend on the state of prudential regulation in the euro area? To address this question, we first identify regulatory cycles from a cumulative prudential policy index that tracks the evolution of the regulatory stance in the euro area. Using sign restrictions in a local projections framework with state-dependency, we identify loan supply shocks and analyze their business cycle effects in regimes with tight and loose prudential regulation. We find that in tight regimes, expansionary shocks trigger a boom-bust cycle. In the loose regime, results appear inconclusive. We also observe tendencies toward asymmetry in the responses across regimes. While results for the tight regime are robust, the effect of shocks on the business cycle is sensitive to identified loose regimes.

Suggested Citation

  • Paul Rudel, 2024. "Loan Supply Shocks, Prudential Regulation, and the Business Cycle," MAGKS Papers on Economics 202409, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:202409
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    More about this item

    Keywords

    Prudential regulation; business cycle; loan supply; euro area; state-dependence; local projections; sign restrictions;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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