October 2013

Changes in Bank Lending Standards and the Macroeconomy

William F. Bassett, Mary Beth Chosak, John C. Driscoll, and Egon Zakrajsek

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Identifying macroeconomic effects of credit shocks is difficult because many of the same factors that influence the supply of loans also affect the demand for credit. Using bank-level responses to the Federal Reserve's Loan Officer Opinion Survey, we construct a new credit supply indicator: changes in lending standards, adjusted for the macroeconomic and bank-specific factors that also affect loan demand. Tightening shocks to this credit supply indicator lead to a substantial decline in output and the capacity of businesses and households to borrow from banks, as well as to a widening of credit spreads and an easing of monetary policy.

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Keywords: Credit supply disruptions, bank lending policies, credit crunch

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Last Update: July 10, 2020