Credit demand, credit supply, and economic activity

Abstract

In this paper, we attempt to identify the separate contributions of credit demand, supply of financial intermediation, and supply of funds to fluctuations in indicators of credit conditions and to fluctuations in economic activity. We estimate a common factor model in which the six factors correspond to supply of funds, financial intermediation, credit demand, aggregate uncertainty, real economic activity, and inflation. We use a simple model of financial intermediation to motivate restrictions on the factor loadings designed to identify supply of funds, uncertainty, credit demand, and financial intermediation factors. We find that the supply of funds and financial intermediation factors explain most of the variation in interest rates spreads, while the financial intermediation and credit demand factors typically contribute to most of the fluctuations in credit quantity variables. For credit indicators, the 2008–2009 financial crisis appears to be largely due to a decline in the financial intermediation. However, this decline in financial intermediation seems to have originated from output and uncertainty shocks, rather than shocks to financial intermediation itself.