Credit-related Shocks in VAR Models: The Case of Lithuania

Tomas Reichenbachas

doi:10.15388/ekon.2017.3.11547

Abstract

This article provides empirical evidence on the role played by credit-related shocks over the business cycle in Lithuania. To this end, we estimate a vector auto regression (VAR) with credit and housing variables and identify credit-related shocks. Using sign restriction, we identify credit supply shocks; while using zero restrictions, we identify credit spread shocks. We find evidence that credit-related shocks have a significant effect on housing and credit market variables, while the effect on GDP is less pronounced but still significant. While credit supply shocks weighed down on economic growth during the period from 2008 to 2014, the effect turned positive in 2014.

Highlights

This view was shaken after the fall of the Lehman Brothers in 2008, which marked the onset of the global financial crisis, during which many advanced economies experienced serious financial turmoil and deep recessions
It is widely agreed that financial liberalization, monetary conditions and a buoyant credit market activity greatly contributed to the rise of the economic and financial imbalances prior to the crisis, whereas shocks originating in credit markets were the actual trigger of the global financial crisis in 2008
We aim to investigate the relative importance of credit supply shocks in determining economic developments during the economic cycle in Lithuania

Summary

Introduction

During the so-called Great Moderation, there was a widespread belief among economists that credit and housing are not important in explaining business cycle fluctuations. this view was shaken after the fall of the Lehman Brothers in 2008, which marked the onset of the global financial crisis, during which many advanced economies experienced serious financial turmoil and deep recessions. During the so-called Great Moderation, there was a widespread belief among economists that credit and housing are not important in explaining business cycle fluctuations.. During the so-called Great Moderation, there was a widespread belief among economists that credit and housing are not important in explaining business cycle fluctuations.1 This view was shaken after the fall of the Lehman Brothers in 2008, which marked the onset of the global financial crisis, during which many advanced economies experienced serious financial turmoil and deep recessions. Some of the drivers behind credit supply change endogenously in line with changing economic conditions, but there is an exogenous element signifying changes in exogenous bank risk preferences or the availability of external financing. We build a VAR model and try to identify creditrelated exogenous shocks using sign restrictions

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