The Role of Loan Supply Shocks in Pacific Alliance Countries: A TVP-VAR-SV Approach
Abstract
This paper analyzes the e§ect of loan supply shocks on the real economic activity of PaciÖc Alliance
countries. The econometric approach is a Time-Varying Parameter VAR with Stochastic Volatility
(TVP-VAR-SV), which is identiÖed by sign restrictions. Results of a trace test, t-tests and the
Kolmogorov-Smirnov test reveal the existence of signiÖcant changes in the distribution of parameters over time, which supports the use of time-varying parameters. The results indicate that loan
supply shocks have an important impact on real economic activity in all PaciÖc Alliance countries:
about 1% in Colombia, Mexico, and Peru, and about 0.5% in Chile. Moreover, loan supply shocks
have a considerable role in driving business cycle áuctuations, not only in crisis periods, but also in
stability periods. Their contribution to GDP growth is higher than that of aggregate supply shocks
and as high as that of aggregate demand and monetary policy shocks. The evolution of the impact
of loan supply shocks on real economic activity shows evidence of cross-country heterogeneity, reáecting di§erent Önancial structures among PaciÖc Alliance countries. Furthermore, by assessing
the e§ects on di§erent measures of economic activity, it is estimated that loan supply shocks have
a higher impact on domestic demand, while the impact is similar when the model is estimated for
non-primary activities. Finally, the sensitivity analysis indicates that the results of the model are
robust to di§erent priors speciÖcations, to di§erent measures of external variables, and to multiple
sets of sign restrictions. Moreover, by applying an agnostic identiÖcation, the results indicate that
even letting the response of GDP unrestricted, its response to loan supply shocks remains positive
and signiÖcant. With this multiple speciÖcation, the impact of loan supply shocks on GDP growth
ranges between 0.8% and 1.2% in Peru and Colombia, and between 0.5% and 0.8% in Chile. These
results are close to the baseline estimation and show robustness. Regarding Mexico, it is estimated
that the impact of loan supply shocks varies between 0.8%-3.5%.
Descripción
Documento de trabajo; 467