Credit channel and credit shocks in Canadian macrodynamics - a structural VAR approach

The idea that financial structure and output determination may be interrelated has gone through several cycles over the past half a century since its inception at the time of the Great Depression. In its latest reincarnation as the theory of financial acceleration, it considers financial factors as propagation mechanisms for the disturbances originating in the real economy. The agency costs of credit allocation by the financial intermediaries play a central role in this theory. Financial factors have rarely been studied as potential sources of variation in the economy. This article, however, investigates the origination of disturbances from bank credit and allows for the propagation of disturbances within a relatively simple macro-dynamic system that utilizes the Structural Vector Autoregression approach The findings for the Canadian economy provide support for the 'credit view' of the monetary policy transmission mechanism. They also show that bank credit to persons affects real output in the short run, whereas bank credit to businesses does not. In other words, consumers but not the business firms appear to be credit constrained.