Intra-Financial Lending, Credit, and Capital Formation

Institute for New Economic Thinking Working Paper Series No. 21

36 Pages Posted: 29 Oct 2015 Last revised: 22 Feb 2022

See all articles by Juan Montecino

Juan Montecino

University of Massachusetts Amherst, Department of Economics, Students

Gerald Epstein

University of Massachusetts at Amherst - College of Social and Behavioral Sciences - Department of Economics

Date Written: December 17, 2014

Abstract

This paper examines the effects of intra-financial lending – claims between financial institutions – on aggregate investment and credit to the non-financial sector in the United States. Building on Montecino, Epstein, and Levina (2014) we document a large growth in intra-financial assets beginning in the early 1980s. Using a vector autoregression model, we find that intra-financial lending is negatively related to gross capital formation and present evidence that this operates through a credit channel. However, we also find evidence of a structural break around the year 2000. Rolling impulse response functions suggest the presence of two alternative regimes over the post-war period: a “capital diversion” regime in which credit to the non-financial sector and intra-financial lending are substitutes, as well as a financial bubble regime in which credit and intra-financial lending are complements. In the latter case, credit to the non-financial sector and intra-financial lending appear to reinforce each other, although unsustainably. Our results suggest that increased intra-financial lending does not reflect financial innovations associated with more efficient risk bearing, liquidity provision, and credit allocation.

JEL Classification: G01, G10, G20

Suggested Citation

Montecino, Juan and Epstein, Gerald, Intra-Financial Lending, Credit, and Capital Formation (December 17, 2014). Institute for New Economic Thinking Working Paper Series No. 21, Available at SSRN: https://ssrn.com/abstract=2682877 or http://dx.doi.org/10.2139/ssrn.2682877

Juan Montecino

University of Massachusetts Amherst, Department of Economics, Students ( email )

Amherst, MA 01003
United States

Gerald Epstein (Contact Author)

University of Massachusetts at Amherst - College of Social and Behavioral Sciences - Department of Economics ( email )

Amherst, MA 01003
United States
413-545-4815 (Phone)

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