From Subprime Loans to Subprime Growth? Evidence for the Euro Area
March 1, 2009
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Summary
The global financial crisis has highlighted the potential of financial conditions for influencing real economic activity. We examine the linkages between the financial and real sectors in the euro area, finding that (i) bank loan supply responds negatively to declines in bank soundness; (ii) a cutback in bank loan supply has a negative impact on economic activity; (iii) a positive shock to the corporate bond spread lowers industrial output; and (iv) risk indicators for the banking, corporate, and public sectors show an improvement beginning in 2002–03, followed by a major deterioration since 2007. These estimates imply that the currently estimated bank losses would subtract some 2 percentage points from the euro area output (but with considerable uncertainty around the estimates).
Subject: Bank credit, Banking, Corporate bonds, Credit, Demand for money, Financial institutions, Loans, Money
Keywords: bank, Bank credit, bank loan supply, contingent claims approach, Corporate bonds, Credit, demand and supply, Demand for money, demand shock, euro, Euro area, Europe, financial sector, financing condition, Global, lending, lending standard, linkages, Loans, money demand demand shock, real sector, WP
Pages:
35
Volume:
2009
DOI:
Issue:
069
Series:
Working Paper No. 2009/069
Stock No:
WPIEA2009069
ISBN:
9781451872163
ISSN:
1018-5941
