The Flow Approach to Credit Markets: Methodology, Measurements, and Macro Perspectives

Abstract

We provide empirical foundations for a flow approach to credit markets and derive novel extensive/intensive margin decompositions for aggregate credit dynamics. Using bank-firm level data for commercial lending in France, we establish that the creation and destruction of credit relationship flows are (i) one order of magnitude larger than net flows, and (ii) volatile and pervasive throughout the cycle. Banks actively adjust their loan portfolios along the extensive margin, which (iii) contributes up to 46% of the cyclical and 90% of the long-run credit variations. We also document the distinct features of the extensive and intensive margin channels of monetary policy.

Keywords: Credit Flows; Financial Institutions; Monetary Policy Transmission; Relationship Lending; Search and Matching

JEL Classification: E50, G20