Bank Credit Creation, Allocation, and Empirical Identification: A Literature Review

Abstract

As poor blood circulation has its perils, bank credit slowdowns have critical policy implications. Our paper provides a theoretical and empirical understanding of the determinants of bank credit supply dynamics. We start by explaining the credit creation mechanism and clarifying the role of pre-existing deposits and reserves. Second, we examine how interest rates are determined and how market imperfections affect their impact on credit supply. We also examine the impact of risk management on lending activity. Finally, we explore how some identification issues complicate the analysis of credit slowdown and propose an empirical tool to overcome these issues.

Keywords: Credit supply, Credit crunch, Credit rationing, Disequilibrium models

JEL Classification: E43, E51, G21