Working Paper

The Role of Sentiment in the Provision of Credit

ASP Working Paper Series

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.

Author

Björn Meyer

Info

Publication Date
JEL Classification
E22, E32, E44