External Shocks, Bank Lending Spreads, and Output Fluctuations*

doi:10.1111/j.1467-9396.2007.00658.x

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Wiley InterScience

Review of International Economics

Volume 16 Issue 1, Pages 1 - 20

Published Online: 22 May 2007

International Economics and Finance Society

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External Shocks, Bank Lending Spreads, and Output Fluctuations*

Pierre-Richard Agénor ¹ , Joshua Aizenman ² , and Alexander W. Hoffmaister ³

¹ University of Manchester, UK
² Department of Economics, University of California at Santa Cruz, USA
³ International Monetary Fund, USA

Correspondence to Agénor: University of Manchester, Oxford Road, Manchester M13 9PL, UK; and Centre for Growth and Business Cycle Research. Tel: (44) (0) 1 61 275-0278; Fax: (44) (0) 1 61 275-4928; E-mail: pierre-richard.agenor@manchester.ac.uk. Aizenman: Department of Economics, University of California at Santa Cruz, 217 Social Sciences 1, Santa Cruz, CA 95064, USA; and National Bureau of Economic Research. Tel: (1) 831-459-4791; E-mail: jaizen@uscs.edu. Hoffmaister: International Monetary Fund, 720 19th Street NW, Washington, DC 20431, USA. Tel: (1) 202-623-1000; E-mail: ahoffmaister@imf.org.

* We are grateful to Luis Catão for sharing his data with us, and to Martin Eichenbaum, Andrew Powell, Alejandro Werner, Peter Wickham, participants at various conferences, and two anonymous referees for useful comments. Brooks Calvo and Nihal Bayraktar provided excellent research assistance. The views expressed here do not necessarily represent those of the Fund.

ABSTRACT

This paper studies the effects of external shocks on bank lending spreads and output fluctuations in Argentina during the early 1990s. The first part presents the analytical framework. The second presents a VAR model that relates bank lending spreads, the cyclical component of output, the real lending rate, and the external interest rate spread. Impulse response functions show that a positive shock in external spreads leads to higher domestic spreads and lower output. Historical decompositions show that shocks to external spreads in the immediate aftermath of the Mexican peso crisis had a sizable effect on movements in output and domestic spreads.

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/j.1467-9396.2007.00658.x About DOI