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

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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
Article number101225
JournalFinance Research Letters
Volume33
DOIs
Publication statusPublished - 2020 Mar

Bibliographical note

Funding Information:
We are grateful to Ki Young Park, Kwangyong Park, Yizhi Xu, and Eric Young for their helpful suggestions. We also have benefited from comments and suggestions by the editor and one anonymous referee. Junhyeok Shin provided excellent research assistance. This work was supported (in part) by the Yonsei University Future-leading Research Initiative of 2018 (2018-22-0185). All remaining errors are my own. We are grateful to Ki Young Park, Kwangyong Park, Yizhi Xu, and Eric Young for their helpful suggestions. We also have benefited from comments and suggestions by the editor and one anonymous referee. Junhyeok Shin provided excellent research assistance. This work was supported (in part) by the Yonsei University Future-leading Research Initiative of 2018 ( 2018-22-0185). All remaining errors are my own.

Funding Information:
We are grateful to Ki Young Park, Kwangyong Park, Yizhi Xu, and Eric Young for their helpful suggestions. We also have benefited from comments and suggestions by the editor and one anonymous referee. Junhyeok Shin provided excellent research assistance. This work was supported (in part) by the Yonsei University Future-leading Research Initiative of 2018 (2018-22-0185). All remaining errors are my own.

Publisher Copyright:
© 2019 Elsevier Inc.

All Science Journal Classification (ASJC) codes

  • Finance

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