Changes in the effects of bank lending shocks and development of public debt markets

Research output: Contribution to journalArticle

Abstract

This paper investigates whether the effect of bank lending shocks has changed over time using a sign-restriction Vector Autoregression approach. To the extent to which the effect of bank lending shocks depends critically on firms’ ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s might have weakened this effect. Indeed, we confirm that the effect of bank lending shocks on output has decreased significantly since the 1980s. Consistent with the financial innovation-based explanation of such reduced effects of bank lending shocks, we find that their effects on corporate bond markets have substantially changed as well. These changes in the substitutability between loans and bonds via financial innovation are key to understanding the reduced effect of bank lending shocks. Supporting our identifying assumptions regarding firms’ ability to access alternative sources of financing, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.

Original languageEnglish
JournalFinance Research Letters
DOIs
Publication statusPublished - 2019 Jan 1

Fingerprint

Bank lending
Public debt
Financing
Financial innovation
Corporate bonds
Bond market
Substitutability
Sign restrictions
Loans
Vector autoregression

All Science Journal Classification (ASJC) codes

  • Finance

Cite this

@article{c3e8168c13e74ff1906c2a3dfcc31b06,
title = "Changes in the effects of bank lending shocks and development of public debt markets",
abstract = "This paper investigates whether the effect of bank lending shocks has changed over time using a sign-restriction Vector Autoregression approach. To the extent to which the effect of bank lending shocks depends critically on firms’ ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s might have weakened this effect. Indeed, we confirm that the effect of bank lending shocks on output has decreased significantly since the 1980s. Consistent with the financial innovation-based explanation of such reduced effects of bank lending shocks, we find that their effects on corporate bond markets have substantially changed as well. These changes in the substitutability between loans and bonds via financial innovation are key to understanding the reduced effect of bank lending shocks. Supporting our identifying assumptions regarding firms’ ability to access alternative sources of financing, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.",
author = "Sangyup Choi",
year = "2019",
month = "1",
day = "1",
doi = "10.1016/j.frl.2019.06.023",
language = "English",
journal = "Finance Research Letters",
issn = "1544-6123",
publisher = "Elsevier BV",

}

TY - JOUR

T1 - Changes in the effects of bank lending shocks and development of public debt markets

AU - Choi, Sangyup

PY - 2019/1/1

Y1 - 2019/1/1

N2 - This paper investigates whether the effect of bank lending shocks has changed over time using a sign-restriction Vector Autoregression approach. To the extent to which the effect of bank lending shocks depends critically on firms’ ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s might have weakened this effect. Indeed, we confirm that the effect of bank lending shocks on output has decreased significantly since the 1980s. Consistent with the financial innovation-based explanation of such reduced effects of bank lending shocks, we find that their effects on corporate bond markets have substantially changed as well. These changes in the substitutability between loans and bonds via financial innovation are key to understanding the reduced effect of bank lending shocks. Supporting our identifying assumptions regarding firms’ ability to access alternative sources of financing, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.

AB - This paper investigates whether the effect of bank lending shocks has changed over time using a sign-restriction Vector Autoregression approach. To the extent to which the effect of bank lending shocks depends critically on firms’ ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s might have weakened this effect. Indeed, we confirm that the effect of bank lending shocks on output has decreased significantly since the 1980s. Consistent with the financial innovation-based explanation of such reduced effects of bank lending shocks, we find that their effects on corporate bond markets have substantially changed as well. These changes in the substitutability between loans and bonds via financial innovation are key to understanding the reduced effect of bank lending shocks. Supporting our identifying assumptions regarding firms’ ability to access alternative sources of financing, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.

UR - http://www.scopus.com/inward/record.url?scp=85068370576&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85068370576&partnerID=8YFLogxK

U2 - 10.1016/j.frl.2019.06.023

DO - 10.1016/j.frl.2019.06.023

M3 - Article

AN - SCOPUS:85068370576

JO - Finance Research Letters

JF - Finance Research Letters

SN - 1544-6123

ER -