Loan supply shocks during the financial crisis: Evidence for the Euro area

This paper employs a panel vector autoregressive model for the member countries of the Euro Area to explore the role of banks during the slump of the real economy that followed the financial crisis. In particular, we seek to quantify the macroeconomic effects of adverse loan supply shocks, which are identified using sign restrictions. We find that loan supply shocks significantly contributed to the evolution of the loan volume and real GDP growth in all member countries during the financial crisis. However, concerning both, the timing and the magnitude of the shocks our results also indicate that the Euro Area was characterized by a considerable degree of cross-country heterogeneity.

► We use a panel VAR model for the Euro areato quantify the effects of adverse loan supply shocks. ► We find that loan supply shocks intensified the economic slump after the recent financial crisis. ► The impact of shocks across member countries is characterized by a certain degree of heterogeneity. ► The dichotomy may be explained by the different time pattern of bank equity increases.