Global Credit Shocks and Real Economies

A rich literature has established the importance of global funding conditions (‘global liquidity’) for the international financial system (e.g. Borio, McCauley, and McGuire 2011). In particular, Eickmeier, Gambacorta, and Hofmann (2014) made an important contribution by presenting a structural decomposition of global liquidity. However, the interplay of structural global liquidity surprises with domestic business cycles has yet received only minor attention. With given quantifications of global credit demand and supply shocks at hand, we estimate the marginal effects of identified components of global liquidity on 43 real economies. Going beyond the aggregate view at global liquidity provided in Eickmeier et al. (2014), we put a particular focus on the sectoral origins (i.e. public vs. private) of credit demand/supply components, and rely on factoraugmented vector-autoregressions to trace disaggregated credit shocks through the real economy (output, inflation and unemployment). Specifically, business credit supply and government credit demand boost the business cycle, whereas household credit supply is found to deteriorate output. We find substantial heterogeneity with respect to prevalence and amplitude of global sectoral credit shocks on real aggregates within the time and cross-sectional (country) dimension.