The dynamics of credit reallocation: South Korea's post-crisis experience

Abstract

This paper explores the driving forces behind the dynamic movements of credit reallocation using quarterly Korean non-financial firm data from 1999:Q4 to 2014:Q2. Using structural vector autoregressive models, this paper uncovers evidence that aggregate shocks play a dominant role in driving fluctuations in credit growth, while allocative shocks play a major role in driving fluctuations in credit reallocation, particularly loan reallocation. I further investigate the driving forces from an industry perspective using a Bayesian dynamic latent factor model. The common factor that explains common movements across manufacturing industries moves in accordance with gross loan reallocation. However, the factor plays the least important role in driving fluctuations of credit reallocation, while sectoral or idiosyncratic disturbances are the driving forces behind fluctuations in credit reallocation intensity. The findings imply that heterogeneity in industrial credit market dynamics is a key source of the evolution of credit reallocation.