Cyclical Lending Standards: A Structural Analysis

Chen, Kaiji; Higgins, Patrick C.; Zha, Tao

doi:10.29338/wp2020-06

Working Paper

Cyclical Lending Standards: A Structural Analysis

Abstract: Lending standards are a direct measure of credit conditions. We use the micro data merged from three separate sources to construct this measure and document that an uncertain macroeconomic outlook, rather than banks' balance sheet positions, was an important reason that a majority of banks tightened bank lending standards during the Great Recession. Our extensive data analysis disciplines how we introduce credit frictions in the banking sector into a macroeconomic model. The model estimation reveals that an exogenous shock to credit supply drives cyclical lending standards and accounts for a significant portion of fluctuations in bank loans and aggregate output.

Keywords: endogenous regime switching; asymmetric credit allocation; land prices; heavy GDP; debt-to-GDP ratio; nonlinear effects; GDP growth target; heavy loans; real estate; bank loans; business cycles; debt;