An Extension of the Bank-Lending Channel by Adding a Diversified Credit Demand : A Time-Varying Non Parametric Approach

This paper aims to evaluate validity of Bank-Lending Channel Revisited theory (BLCR) within a macroeconomic framework extended for diversified credit demand. The extension of BLCR model (EBLCR) relaxed assumption of credit cycle as a function of bank lending rate and enabled a more comprehensive analysis of demand for credit. In order to include a diversified credit demand in the original BLCR model, we put an alternative financing source in addition to the bank lending; the commercial papers market. This extension seems to undermine the main conclusions provided by BLCR; banks financing cost is not the only relevant variable in driving credit cycle. Specifically, bank lending and commercial papers may become “close” substitutes following monetary policy and aggregate demand shock, reducing the relevance of bank lending in whole credit market. In order to develop this reasoning; we have looked at U.S economy during the period 1°Q 1980 - 1°Q 2020 through a time-varying non-parametric VAR model