Do Global Public and Private Credit Shocks Distinctly Impact the Business Cycle? Evidence from 38 Advanced and Emerging Economies

Abstract

A rich literature has established the importance of global funding conditions (`global liquidity') for the international financial system. In particular, Eickmeier, Gambacorta, and Hofmann (2014) made an important contribution by presenting a structural decomposition of global liquidity. However, the interplay of structural global liquidity with domestic business cycles has yet received only minor attention. With given quantifications of global credit demand and supply shocks at hand, we estimate the marginal effects of identified components of global liquidity on 38 real economies. Going beyond the aggregate view at global liquidity we put a particular focus on the sectoral origins (i.e. public vs. private) of credit demand/supply components, and rely on factor-augmented vector-autoregressions to trace disaggregated credit shocks through the real economy (output, inflation and nemployment). We find substantial heterogeneity with respect to transmission channels and effect magnitudes of global sectoral credit shocks on real aggregates. Specifically, business credit supply and government credit demand boost, whereas household credit supply is found to deteriorate output.

Keywords: Credit shocks, credit composition, real economy, structural VAR, FAVAR

JEL Classification: C22, E32, E44, E51