Slowdown of credit flows in the euro area: Supply or demand driven?
The economic crisis has spread from financial markets to real economies in countries around the world. There is a large literature on the global transmission of past financial crises which mostly finds strong evidence for the transmission of global shocks to liquidity and global capital flows. The studies have resulted in a worldwide slowdown of credit flows which affected investment activities and business cycle. The effect of changes in bank capital on the banks’ lending is a key determinant of the linkage between financial conditions and real activity. Quantifying of this transmission is one of the most important topics of the recent financial crisis, especially in the context of European recovery.
We apply disequilibrium model of credit demand and supply to test credit crunch hypothesis. We suppose that firms face credit rationing and the realised loan outstanding will be the minimum of the desired level of commercial bank loans and the bank limit for the firm. We adopted the disequilibrium model which consists of credit, supply and transaction equation. We suggest that actual observed credit at time t lies on the supply curve (excess demand), or on the demand curve (excess supply), or on both (equilibrium). Our model is estimated by full-information maximum likelihood approach with a numerical maximization of the likelihood function.
Our basic findings show that significant decrease in credits after the financial crisis in the year 2007 was caused by low economic and investment activity and reject the hypothesis that credit crunch occurs.
Keywords:
credit crunch, disequilibrium model, maximum likelihood approach, credit