Credit Spreads and the Links between the Financial and Real Sectors in a Small Open Economy: The Case of the Czech Republic

23 Pages Posted: 11 Sep 2014

See all articles by Tomas Konecny

Tomas Konecny

Czech National Bank (CNB); CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Oxana Babecká Kucharčuková

Czech National Bank (CNB)

Date Written: September 4, 2014

Abstract

Various approaches have been employed to explore the possibility of non-linear feedback between the real and financial sector. The present study focuses on the impact of real shocks on selected financial sector indicators, and the responses of the real economy to impulses emanating from the financial sector. We estimate the threshold Bayesian VAR with block restrictions and the credit spread as a threshold variable using the example of the Czech Republic. We find that while there is no evidence of asymmetric effects across positive and negative shocks, the responses of the financial sector to real shocks tend to differ in low and high credit spread regimes. Responses in the opposite direction (i.e. from the financial sector to the real economy) are procyclical and similar irrespective of regime. A positive shock to credit and a negative shock to the NPL increase industrial production over the entire time horizon. The direct impact of foreign factors on lending seems to be rather limited.

Keywords: credit, small open economy, non-linearities

JEL Classification: E51, C15, C32

Suggested Citation

Konecny, Tomas and Babecká Kucharčuková, Oxana, Credit Spreads and the Links between the Financial and Real Sectors in a Small Open Economy: The Case of the Czech Republic (September 4, 2014). ECB Working Paper No. 1730. Available at SSRN: https://ssrn.com/abstract=2491464

Tomas Konecny (Contact Author)

Czech National Bank (CNB) ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

Politickych veznu 7
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Oxana Babecká Kucharčuková

Czech National Bank (CNB) ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

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