Credit market heterogeneity, balance sheet (in)dependence, financial shocks
Stellenbosch Working Paper Series No. WP15/2016Publication date: 2016
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
This paper presents a real business cycle model with financial frictions and two credit markets to investigate the qualitative and quantitative relevance of credit market heterogeneity. To address this line of inquiry we contrast the transmission of financial shocks in an economy where loans are the only form of credit to one in which both loans and bonds exist. We estimate the model using Bayesian methods over the sample period 1985Q1 - 2015Q1 for the U.S. economy. We find that credit market heterogeneity plays an important role in attenuating the impact of financial shocks by allowing borrowers to substitute away from the affected credit market. The shock attenuation property of credit market heterogeneity works through asset prices and substitution toward alternative credit types. Bank balance sheet linkages reduce the shock attenuation effect associated with heterogeneous credit markets. The origination of financial shocks can influence both the size and the persistence of their impact.
JEL Classification:E32, E43, E44, E51, E52, E20
Keywords:Credit Market, Business Cycle, Financial Intermediation, Operational Diversification, Heterogeneity, DSGE
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Prof Euan Phimister: Stellenbosch Business School
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Topic: "Allocative Efficiency, Labour Shares, and Corporate Lobbying in European Manufacturing"
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26 Sep 2025 Free Weekly Review | Number 37 | 26 SeptemberThis report covers the key domestic and international data releases over the past week. The more comprehensive BER Weekly Review (Enhanced Version) includes a detailed discussion on the main economic events and developments over the past week, a summary of upcoming data (the week ahead) and the BER’s forecast for key economic indicators....
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