Working Paper: CEPR ID: DP2569
Authors: Giovanni Dell'Ariccia; Pietro Garibaldi
Abstract: This paper contributes to the empirical and theoretical knowledge of gross credit flows: the simultaneous process of credit expansion and contraction associated with a net change in the aggregate quantity of credit. Empirically, the paper summarizes heterogeneity in the banking industry by estimating gross credit flows for the entire US banking system between 1979 and 1999. The empirical exercise shows that sizeable gross flows coexist at any phase of the cycle, even within narrowly defined regional units and bank size categories. Furthermore, the paper finds that aggregate credit contraction is a concentrated series, which implies that a burst in credit contraction is followed by prolonged periods of low contraction. Theoretically, the paper proposes a matching model in which financiers have to spend time and resources to expand credit to heterogeneous entrepreneurs. The outcome of the model resulting from the combination of idiosyncratic shocks and asymmetric adjustment to positive and negative aggregate shocks appears consistent with the empirical properties of aggregate credit flows.
Keywords: flows; matching models
JEL Codes: E40; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit expansion (E51) | net credit flow (F32) |
| credit contraction (E51) | net credit flow (F32) |
| credit contraction (E51) | credit expansion (E51) |
| reallocative shocks to liquidity (E44) | credit contraction (E51) |
| reallocative shocks to liquidity (E44) | credit expansion (E51) |
| credit expansion (E51) | aggregate credit (E10) |
| credit contraction (E51) | aggregate credit (E10) |