Spillover Effects of Credit Demand and Supply Shocks in the EU Countries: Evidence from a Structural GVAR

Abstract

We identify the effects of changes in financial intermediation, referred to as credit shocks, both from the demand side and the supply side, using a structural GVAR. We gain insights into the contribution of these shocks to the real economy, in particular their impact on lending to non/financial corporations and GDP growth, which we evaluate by means of historical decomposition and FEVD. Furthermore, we analyse the transmission of shocks in one country to other countries with close financial linkages to understand better the role of contagion during turbulent times. We find considerable heterogeneity in the financial cycles between countries and the role of credit demand and supply shocks during the build up and aftermath of the financial crisis.