Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Does Credit Supply Accelerate Business Cycle Changes in Korea?: Some New Evidence by Incorporating Regime Changes

Vol.31, No.2, June , 19–39



  •   (Ewha Womans University)

  •   (Korea University)

  •   (Sogang University)

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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.


Keywords
   Credit Supply, Business Cycle, Pro-Cyclicality, VEC Model, STAR Model

JEL classification codes
   E32, G21, G28
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