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International liquidity shocks and domestic loan supply in the euro area

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  • Zwick, Lina

Abstract

After two decades of increased financial market integration, particularly driven by the banking sector, during the recent financial crisis capital flows decreased sharply, and especially banking flows were affected. At the same time loan volume in Euro Area countries slowed down, evoking concerns that domestic banks might have restricted their domestic lending activities due to international liquidity shortages. To probe this explanation, this paper analyzes the macroeconomic effects of adverse international liquidity shocks for eleven Euro Area countries between 2003 and 2013 on a quarterly basis. The international liquidity shocks are identified by applying a panel vector autoregressive (VAR) model with sign restrictions. The analysis reveals no significant decline in loan volume after such a shock. Rather, domestic banks presumably react by withdrawing money from abroad, thereby buffering the impact of the sharp decrease of capital inflows on the domestic economy.

Suggested Citation

  • Zwick, Lina, 2015. "International liquidity shocks and domestic loan supply in the euro area," Ruhr Economic Papers 564, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:564
    DOI: 10.4419/86788650
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    Cited by:

    1. Hristov, Nikolay & Hülsewig, Oliver & Wollmershäuser, Timo, 2020. "Capital flows in the euro area and TARGET2 balances," Journal of Banking & Finance, Elsevier, vol. 113(C).
    2. Timmer , Yannick, 2015. "TARGET2 balances and the adjustment of capital flows in the Euro area," European Economic Letters, European Economics Letters Group, vol. 4(1), pages 15-19.
    3. Unger, Robert, 2017. "Asymmetric credit growth and current account imbalances in the euro area," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 435-451.
    4. repec:wsr:wpaper:y:2016:i:166 is not listed on IDEAS

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    More about this item

    Keywords

    international capital flows; Panel VAR; loan supply restrictions; home bias;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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