Credit Matters: Empirical Evidence on U.S. Macro-Financial Linkages

29 Pages Posted: 16 Jul 2008

See all articles by Tamim Bayoumi

Tamim Bayoumi

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Ola Melander

Stockholm School of Economics

Date Written: July 2008

Abstract

This paper develops a framework for analyzing macro-financial linkages in the United States. We estimate the effects of a negative shock to banks' capital/asset ratio on lending standards, which in turn affect consumer credit, mortgages, and corporate loans, and the corresponding components of private spending (consumption, residential investment and business investment). In addition, our empirical model allows for feedback from spending and income to bank capital adequacy and credit. Hence, we trace the full credit cycle. An exogenous fall in the bank capital/asset ratio by one percentage point reduces real GDP by some 1½ percent through its effects on credit availability, while an exogenous fall in demand of 1 percent of GDP is gradually magnified to around 2 percent through financial feedback effects.

Keywords: United States, Credit, External shocks, Capital markets, Asset ratio, Consumer credit, Corporate sector, Loans, Gross domestic product

Suggested Citation

Bayoumi, Tamim and Melander, Ola, Credit Matters: Empirical Evidence on U.S. Macro-Financial Linkages (July 2008). IMF Working Papers, Vol. , pp. 1-27, 2008. Available at SSRN: https://ssrn.com/abstract=1160059

Tamim Bayoumi

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6333 (Phone)
202-623-4795 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ola Melander (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

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