Abstract
This paper aims at studying the mechanisms through which credit markets convey financial shocks to the real economy. To accomplish this task, we perform a comprehensive assessment of the credit market dynamics in the Euro Area, from their drivers and evolution over time to the cross-country heterogeneity of their effects. We do so by employing a Bayesian TVP-FAVAR model which adopts a novel identification strategy exploiting data on 11 Euro Area economies (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal and Spain) between 2000:Q1 and 2018:Q4. We find that firms' financing displays higher sensitivity than households’ borrowing to credit demand and supply contractions and that, overall, credit aggregates reactions to such shocks display both time and cross-country heterogeneities. Policy-wise, this evidence highlights the need for structural interventions to better align the functioning of the banking and industrial systems in the Euro Area countries.
