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Uncertainty and credit conditions: Non-linear evidence from firm-level data

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  • Grimme, Christian
  • Henzel, Steffen R.
Abstract
The financial frictions channel highlights the importance of credit conditions for the transmission of rising uncertainty. Using German firm-level survey data for the period 2003 to 2015, we document that a surge in a firm’s business uncertainty worsens its credit conditions. Particularly, we demonstrate that this effect depends on the level of uncertainty: low uncertainty nearly triples the effect compared to high uncertainty episodes. To provide an interpretation, we consider a process in which a firm’s credit conditions are driven by banks’ expectations about the future level of business uncertainty. Increases in uncertainty serve as a signal to update these expectations. Calibrating such a process using our dataset generates a stronger revision of expectations and a larger deterioration of credit conditions under low uncertainty.

Suggested Citation

  • Grimme, Christian & Henzel, Steffen R., 2024. "Uncertainty and credit conditions: Non-linear evidence from firm-level data," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1307-1323.
    • Handle: RePEc:eee:reveco:v:93:y:2024:i:pa:p:1307-1323
    DOI: 10.1016/j.iref.2024.03.039
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    More about this item

    Keywords

    Uncertainty; Financial frictions; Credit conditions; Survey data;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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