Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/281058 
Year of Publication: 
2023
Series/Report no.: 
IWH Discussion Papers No. 21/2023
Publisher: 
Halle Institute for Economic Research (IWH), Halle (Saale)
Abstract: 
This paper contributes to a better understanding of the important role that credit demand plays for credit markets and aggregate macroeconomic developments as both a source and transmitter of economic shocks. I am the first to identify a structural credit demand equation together with credit supply, aggregate supply, demand and monetary policy in a Bayesian structural VAR. The model combines informative priors on structural coefficients and multiple external instruments to achieve identification. In order to improve identification of the credit demand shocks, I construct a new granular instrument from regional mortgage origination. I find that credit demand is quite elastic with respect to contemporaneous macro-economic conditions, while credit supply is relatively inelastic. I show that credit supply and demand shocks matter for aggregate fluctuations, albeit at different times: credit demand shocks mostly drove the boom prior to the financial crisis, while credit supply shocks were responsible during and after the crisis itself. In an out-of-sample exercise, I find that the Covid pandemic induced a large expansion of credit demand in 2020Q2, which pushed the US economy towards a sustained recovery and helped to avoid a stagflationary scenario in 2022.
Subjects: 
Bayesian proxy SVAR
credit demand
credit-driven business cycles
granular instrument
JEL: 
C32
E32
E44
G10
Document Type: 
Working Paper

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