DP2569 | Gross Credit Flows

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This paper contributes to the empirical and theoretical knowledge of gross credit flows: the simultaneous process of credit expansion and contraction associated with a net change in the aggregate quantity of credit. Empirically, the paper summarizes heterogeneity in the banking industry by estimating gross credit flows for the entire US banking system between 1979 and 1999. The empirical exercise shows that sizeable gross flows coexist at any phase of the cycle, even within narrowly defined regional units and bank size categories. Furthermore, the paper finds that aggregate credit contraction is a concentrated series, which implies that a burst in credit contraction is followed by prolonged periods of low contraction. Theoretically, the paper proposes a matching model in which financiers have to spend time and resources to expand credit to heterogeneous entrepreneurs. The outcome of the model resulting from the combination of idiosyncratic shocks and asymmetric adjustment to positive and negative aggregate shocks appears consistent with the empirical properties of aggregate credit flows.