Reversing the Financial Accelerator: Credit Conditions and Macro-Financial Linkages
February 1, 2011
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Summary
This paper examines the role of credit markets in the transmission of U.S. macro-financial shocks through the prism of a financial conditions index (FCI) based on a vector autoregression (VAR) methodology. It explores the relative predictive power of market variables compared to credit standards/conditions. The main conclusion is that under plausible specifications credit conditions dominate market variables, highlighting the importance of credit supply. The fact that direct measures of credit conditions anticipate future movements in asset prices has an extremely important implication. Most models of the credit channel see it as an amplifier of underlying changes in financial wealth. The impact of credit conditions on growth compared to other market variables implies that credit supply drives other financial variables rather than responding to them.
Subject: Asset prices, Bank credit, Credit, Economic sectors, Financial institutions, Loans, Money, Prices, Small and medium enterprises
Keywords: asset price, Asset prices, Bank credit, Credit, credit availability, credit channel, credit condition, credit conditions, credit variable, equity price, Financial conditions index, Global, Loans, market, monetary policy, Output, price, SLOS measure, SLOS series, SLOS survey, Small and medium enterprises, supply variable, Western Europe, WP
Pages:
35
Volume:
2011
DOI:
Issue:
026
Series:
Working Paper No. 2011/026
Stock No:
WPIEA2011026
ISBN:
9781455216734
ISSN:
1018-5941
