Bank Credit and Economic Activity

The role of banks in regional as well as in national economic fluctuations has been the subject of renewed interest in recent years. With what seems like amazing prescience, Bernanke and Blinder (1988) recently revived the theoretical literature on the role of bank credit typically associated with Brunner and Meltzer (1972). The trickle of empirical papers written before the 1990s that focused on bank credit turned into a torrent during the 1990s. The primary impetus for this renewed interest was the 1990-91 recession, which seemed contemporaneously to have been distinguished by the large, and perhaps initiating, role played by reduced bank lending. Statements by government policymakers and the outpouring of research on the role of bank credit in macroeconomic fluctuations over the past five years generally indicated that banks’ capital shortfalls, whether due to regulatory changes or loan losses, reduced bank lending and were highly correlated with reduced output. The strong correlation between loans and output is long-standing. Indeed, the U.S. Department of Commerce classifies various measures of the dollar volume of business and consumer credit outstanding as lagging indicators of output, and it classifies various measures of the change in business and consumer credit as leading indicators of output.