Does credit supply accelerate business cycle changes in Korea? Some new evidence by incorporating regime changes

Sei Wan Kim, Jinill Kim, Jungsoo Park

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

This work empirically investigates how commercial banks’ aggregate credit supply is associated with business cycle over different regimes of the Korean economy. Linear empirical models employed in most of previous studies are subject to a potential missapecification problem because it is well known that both real GDP and credit supply reveal different dynamic properties over different regimes. This work finds that credit supply has asymmetric effect on business cycle for expansion and contraction phases when the Smooth Transition Autoregressive Vector Error Correction Model (or STAR-VECM) is employed. Our empirical findings are as follows. Firstly, we find that credit supply has procyclical effect on real GDP in all phases. Secondly, the procyclical effects are significantly intensified especially in contractionary phases which indicates asymmetry of its effect. In sum, this result supports ‘Credit Acceleration Hypothesis’ of Bernanke et al. (1999). Lastly, we further find that real GDP has asymmetric effects on banks’ credit supply with countercyclical effect on expansionary regimes.

Original languageEnglish
Pages (from-to)19-39
Number of pages21
JournalJournal of Economic Theory and Econometrics
Volume31
Issue number2
Publication statusPublished - 2020 Jun

Keywords

  • Business Cycle
  • Credit Supply
  • Pro-Cyclicality
  • STAR Model
  • VEC Model

ASJC Scopus subject areas

  • Economics and Econometrics

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