Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/301236 
Authors: 
Year of Publication: 
2024
Series/Report no.: 
MAGKS Joint Discussion Paper Series in Economics No. 09-2024
Publisher: 
Philipps-University Marburg, School of Business and Economics, Marburg
Abstract: 
How do the business cycle effects of loan supply shocks depend on the state of prudential regulation in the euro area? To address this question, we first identify regulatory cycles from a cumulative prudential policy index that tracks the evolution of the regulatory stance in the euro area. Using sign restrictions in a local projections framework with state-dependency, we identify loan supply shocks and analyse their business cycle effects in regimes with tight and loose prudential regulation. We find that in tight regimes, expansionary shocks trigger a boom-bust cycle. In the loose regime, results appear inconclusive. We also see quite some tendencies toward asymmetry in the responses across regimes. To some extent, however, the results depend strongly on the cycle identified. While our results for the tight regime are very robust across different specifications, the effect of shocks on the business cycle is sensitive to identified loose regimes. The main reason is the historical development of prudential regulation in the euro area, which is primarily characterized by prudential tightening.
Subjects: 
Prudential Regulation
Business Cycle
Loan Supply
Euro Area,State Dependence
Local Projections
Sign Restrictions
JEL: 
C54
E32
E50
G28
Document Type: 
Working Paper

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