Bank Lending in a Cointegrated VAR Model
Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 8
31 Pages Posted: 3 Oct 2013
Date Written: September 20, 2013
This paper aims at identifying the link between financial markets and the real sector of the economy. Following the literature on the topic, we select a small set of variables representing the principal financial and real dynamics observed for the Italian economy. As a first result, we find cointegration among the chosen set of variables. Thus we specify and estimate a Vector Error Correction Model which captures both the long-run and the short-term dynamics of the multivariate system. The main innovation of this work lies in investigating the link between lending and growth at a monthly frequency. Moreover, we allow the model to include a structural break due to the latest economic and financial crisis. The model obtained represents an innovative forecasting tool for improving the knowledge, now casting and short-term forecasting of the business cycle by exploiting shocks originating from the lending market that propagate to the real economy.
Keywords: Bank Lending, Forecast, Cointegrated VAR
JEL Classification: C53, E47, E51
Suggested Citation: Suggested Citation