How Much Have Lending Standards Constrained US Recovery After the Financial Crisis?

This article uses a stylised vector autoregression to estimate the impact of shocks to lending standards on the depth of US recession and duration of recovery from the 2007−2008 financial crisis. It estimates that the US economic activity was about 0.5 percentage points lower every quarter than in the case when banks' lending standards had not tightened beyond the levels warranted by economic fundamentals. The article further shows empirical evidence that the economic contraction of 2008−2009 would have been 2 percentage points of GDP milder in the absence of the shocks to lending standards sentiment. Finally, the lending sentiment seemed to switch to a loosening bias when GDP recovered to its pre‐recession levels in 2012. [ABSTRACT FROM AUTHOR]