Changes in bank lending standards and the macroeconomy

• We analyze the impact of credit supply shocks on the macroeconomy.
• We construct a new measure of the broad supply of bank-intermediated credit.
• Adverse credit supply shocks are associated with substantial declines in output.
• Adverse credit supply shocks are associated with declines in banks' lending capacity.

Identifying macroeconomic effects of credit shocks is difficult because many of the same factors that influence the supply of loans also affect the demand for credit. Using bank-level responses to the Federal Reserve's Loan Officer Opinion Survey, we construct a new credit supply indicator: changes in lending standards, adjusted for the macroeconomic and bank-specific factors that also affect loan demand. Tightening shocks to this credit supply indicator lead to a substantial decline in output and the capacity of businesses and households to borrow from banks, as well as to a widening of credit spreads and an easing of monetary policy.