Determinants of the Credit Cycle: A Flow Analysis of the Extensive Margin

36 Pages Posted: 28 May 2020

Date Written: March 18, 2020


We use monthly data on individual loans from the Italian Credit Register over the period from 1997 to 2019 and show that bank credit expansions in the non-financial private sector are mostly explained by variations in the extensive margin calculated either in credit flows or headcount of new borrowers. We then build on a flow approach to decompose changes in the net creation of borrowers into gross flows across three states: (i) borrowers, (ii) applicants and (iii) others (neither debtors nor applicants). The paper investigates the macroeconomic dimension of these gross flows and documents three key cyclical facts. First, entries in the credit market by new obligors (`inflows') account for the bulk of volatility in the net creation of borrowers. Second, the volatility of borrower inflows is two times as large as the volatility of obligors exiting the credit market (`outflows'). Third, borrower inflows are highly pro-cyclical, lead the economic cycle, and their fluctuations are mainly driven by the probability of getting a loan from new banks.
We read these results in light of the macrofinance literature on search frictions and on competition with lender-lender informational asymmetries. Overall, our findings support theoretical predictions of these models, but search frictions seem to play a major role in shaping movements along the extensive margin.

Keywords: borrower, applicant, gross flows, business cycle, credit cycle

JEL Classification: E51, E32, E44

Suggested Citation

Cuciniello, Vincenzo and di Iasio, Nicola, Determinants of the Credit Cycle: A Flow Analysis of the Extensive Margin (March 18, 2020). Bank of Italy Temi di Discussione (Working Paper) No. 1266, Available at SSRN: or

Vincenzo Cuciniello (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

Nicola Di Iasio

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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