Identifying the macroeconomic effects of bank lending supply shocks (original) (raw)

Researchers have long hypothesized that exogenous changes to the supply of bank loans should affect economic activity. However, identifying such loan supply shocks is difficult, since loan supply and demand likely share many determinants. In this paper, we use the Federal Reserve's quarterly Senior Loan Officer Opinion Survey to create a new measure of loan supply shocks. We regress banks' individual responses to questions on how they have changed their lending standards over the preceding three months on bank-specific and macroeconomic variables that would be expected to affect loan de-mand or supply. We aggregate the residuals from this regression across banks to create a quarterly series of unexplained changes in bank lending standards from 1992 to 2010. This series accords well with narrative accounts of the period, for example showing sharp and historically large tightenings in 2007 and 2008. When we include the shock measure as the exogenous variable in a VAR-X model w...