Exploring the Trade-Off between Leaning Against Credit and Stabilizing Economic Activity

11 Pages Posted: 27 Sep 2022

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Abstract

Evidence from monetary VARs for ten countries points towards an unfavorable trade-off between leaning against credit fluctuations and stabilizing realeconomic activity. Results are robust both across countries, and based on two alternative approaches, i.e. either (i) focusing on the impact of monetary policyshocks, which I identify based on a combination of zero and sign restrictions, or (ii) analyzing ‘modest’ policy interventions in which the central bank reacts,weakly but systematically, to credit fluctuations. In particular, a modest intervention suggests that in the U.S. during the years leading up to the financialcrisis a 1% shortfall in real GDP would have been associated with a decrease in credit leverage by 2.5 percentage points.

Keywords: Credit, structural VARs, sign restrictions, zero restrictions, Lucas critique.

Suggested Citation

Benati, Luca, Exploring the Trade-Off between Leaning Against Credit and Stabilizing Economic Activity. Available at SSRN: https://ssrn.com/abstract=4231060 or http://dx.doi.org/10.2139/ssrn.4231060

Luca Benati (Contact Author)

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland

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