Working Paper: NBER ID: w27214
Authors: Kaiji Chen; Patrick C. Higgins; Tao Zha
Abstract: Lending standards are a direct measure of credit conditions. We use the micro data merged from three separate sources to construct this measure and document that an uncertain macroeconomic outlook, rather than banks' balance sheet positions, was an important reason that a majority of banks tightened bank lending standards during the Great Recession. Our extensive data analysis disciplines how we introduce credit frictions in the banking sector into a macroeconomic model. The model estimation reveals that an exogenous shock to credit supply drives cyclical lending standards and accounts for a significant portion of fluctuations in bank loans and aggregate output.
Keywords: lending standards; credit supply shocks; Great Recession; banking sector; macroeconomic outlook
JEL Codes: C51; C81; C82; E32; E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous shock to credit supply (E51) | cyclical lending standards (G21) |
| uncertain macroeconomic outlook (E66) | tighten lending standards (G21) |
| tighten lending standards (G21) | reduced bank loans (G21) |
| reduced bank loans (G21) | lower aggregate output (E23) |
| negative credit supply shocks (E51) | increase in frequency of costly state verification (D89) |
| increase in frequency of costly state verification (D89) | tightening of lending standards (G21) |
| credit supply shocks (E51) | fluctuations in bank loans (G21) |
| credit supply shocks (E51) | fluctuations in aggregate output (E32) |