Changes in the Effects of Bank Lending Shocks and Development of Public Debt Markets

Working papers 2019rwp-140, Yonsei University, Yonsei Economics Research Institute

17 Pages Posted: 30 May 2019

Date Written: May 7, 2019

Abstract

This paper investigates whether the effect of bank lending shocks has changed over time using a sign-restriction Vector Autoregression approach. To the extent to which the effect of bank lending shocks depends critically on firms’ ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s might have weakened this effect. Indeed, we confirm that the effect of bank lending shocks on output has decreased significantly since the 1980s. Consistent with the financial innovation-based explanation of such reduced effects of bank lending shocks, we find that their effects on corporate bond markets have substantially changed as well. These changes in the substitutability between loans and bonds via financial innovation are key to understanding the reduced effect of bank lending shocks. Supporting our identifying assumptions regarding firms’ ability to access alternative sources of financing, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.

Keywords: Bank lending shocks, Sign-restriction VARs, Great Moderation, Public debt market, Loans and bonds

JEL Classification: E32, E44, G21

Suggested Citation

Choi, Sangyup, Changes in the Effects of Bank Lending Shocks and Development of Public Debt Markets (May 7, 2019). Working papers 2019rwp-140, Yonsei University, Yonsei Economics Research Institute. Available at SSRN: https://ssrn.com/abstract=3383927 or http://dx.doi.org/10.2139/ssrn.3383927

Sangyup Choi (Contact Author)

Yonsei University ( email )

Seoul
Korea, Republic of (South Korea)

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