Identifying Credit Demand, Financial Intermediation, and Supply of Funds Shocks : A Structural VAR Approach

In this paper, we identify exogenous shocks to credit demand, financial inter-mediation, and supply of funds, and determine the contribution of these shocks to fluctuations in the credit market and overall economic activity. We estimate a structural vector auto-regression model where the three credit shocks are identified with a set of sign restrictions motivated by a simple partial equilibrium model of financial inter-mediation. We find that the credit demand shock explains significantly the variations in the long-term loan rate proxied by the Moody's Baa corporate bond yield, while the supply of funds shock contributes to most of the fluctuations in the short-term commercial paper rate. The financial inter-mediation shock drives most of the fluctuations in the quantity of loans as well as the spread between the Baa and commercial paper rates. Of the credit shocks, we find that the financial inter-mediation shock has the largest impact on real economic activity. In fact, our analysis implies that the sharp decline in output during the 2007-2009 financial crisis is largely attributable to the financial inter-mediation shock, along with shocks originating outside of the financial system