Abstract: This paper measures the ``animal spirits” of U.S. banks and asks whether they are an important determinant of credit conditions and source of business cycle fluctuations. I first construct a novel semi-structural measure of bank-level sentiment, revealing heterogeneous animal spirits across banks and common dynamics marked by surges in pessimism during crises and excessive optimism during periods of elevated asset prices. I then jointly estimate the contribution of shocks to bank and household sentiment, aggregate demand and supply, financial risk, and monetary policy to fluctuations in macroeconomic conditions using a structural BVAR framework. Bank sentiment shocks explain 38% of the business cycle variation in credit conditions, 10% in output, 22% in prices, and 26% in the policy rate.
Coauthored with Elijah Broadbent, Huberto Ennis, and Horacio Sapriza
Abstract: The provision of bank credit to firms and households affects macroeconomic performance. We use survey measures of changes in bank lending standards, disaggregated by loan category, to quantify the effect of changes in banks’ attitudes toward lending on aggregate output, inflation, and interest rates. Bank lending to businesses is particularly important for macroeconomic outcomes, with peak effects on output of around half a percentage point after four quarters of the initial shock. These effects depend on the stage of the business cycle and the proximity of the short-term interest rate to its effective lower bound. The effects are larger when output is growing below trend and when the interest rate is away from its lower bound. We also find that the response of the economy to lending-standards shocks is asymmetric, with tightening shocks having larger effects on output.
Coauthored with Andrea Ajello