The Role of Sentiment in the Provision of Credit

The provision of credit has been shown to be eminent for macroeconomic activity.
Recent research highlighted that optimism may play a role in the provision of credit
through leverage cycles. A decomposition of corporate bond spreads allows the modelling
of a propensity-to-lend through an excess bond premium. In the US economy,
optimism in various sentiment measures causes within a VAR model, including other
financial market variables, a fall of this excess bond premium and therefore increase the
propensity-to-lend. Use of the Michigan Consumer Sentiment Index and animal spirit
indices show a variation of information content in sentiment and different types of animal
spirits. The overall reaction to positive animal spirits seems to be dominated by a
positive response of the credit provision and its subsequent reversal, while an increase
in the MCSI causes a more persistent positive response.