The role of sentiment in the provision of credit

The provision of credit has been shown to be eminent for macroeconomic activity. Recent research highlighted that optimism may play a role in the provision of credit through leverage cycles. A decomposition of corporate bond spreads allows the modelling of a propensity-to-lend through an excess bond premium. In the US economy, optimism in various sentiment measures causes within a VAR model, including other financial market variables, a fall of this excess bond premium and therefore increase the propensity-to-lend. Use of the Michigan Consumer Sentiment Index and animal spirit indices show a variation of information content in sentiment and different types of animal spirits. The overall reaction to positive animal spirits seems to be dominated by a positive response of the credit provision and its subsequent reversal, while an increase in the MCSI causes a more persistent positive response.