The Effect of Credit Supply Shocks on Economic Activity: A Threshold Vector Autoregression Approach

43 Pages Posted: 17 Feb 2019

See all articles by Joshua Wojnilower

Joshua Wojnilower

Independent Evaluation Office of the IMF

Date Written: June 13, 2017

Abstract

Following the recent U.S. financial crisis, a new generation of macroeconomic models considers theoretical constraints to the supply of credit. Concurrently, a growing body of literature demonstrates existence of a nonlinear relationship between credit market conditions, monetary policy, and real economic activity. This paper uses threshold vector autoregressions (TVARs) to determine if the relationship between the supply of credit and the real economy changed over time and under different credit market conditions during the U.S. post-war era. Results yield evidence that a quantitatively important relationship between the supply of credit and real economic activity existed during the entire era and separate from periods of financial stress. Findings, however, also offer evidence that the indirect effect of changes in the supply of credit on real economic activity, operating through their effect on macro risk premia, became quantitatively more important during periods of financial stress in the twenty-first century.

Keywords: Credit Supply, Monetary Policy, Federal Reserve, TVAR, Real GDP, Market-Based Financial System

JEL Classification: G2, E3, E5

Suggested Citation

Wojnilower, Joshua, The Effect of Credit Supply Shocks on Economic Activity: A Threshold Vector Autoregression Approach (June 13, 2017). Available at SSRN: https://ssrn.com/abstract=3330077 or http://dx.doi.org/10.2139/ssrn.3330077

Joshua Wojnilower (Contact Author)

Independent Evaluation Office of the IMF ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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