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Tatom
Kevin L. Kliesen is an economist and John A. Tatom is an
assistant vice president at the Federal Reserve Bank of
St. Louis. James P. Kelley provided research assistance. This
article was written while Tatom was a visiting economist at
the Austrian National Bank Tatom received useful comments
in seminars on this paper at the Bank of the Netherlands,
the Swiss National Bank and the institute of Advanced
Studies in Vienna.
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19
iHIi~(I)Eii~
20
Figure la
Decline in the Supply of Credit
Case I: Reduced willingness to lend
Interest Rate
Si
so
C1
C0
Flow of Credit
Figure lb
Decline in the Demand for Credit
Case II: Reduced loan demand by businesses
Interest Rate
S
--
ND1
Ci
Co
Flow of Credit
///M~ <1/
~///
~//
\~</
///
//
Figure 2
Quarterly Change in Domestic Nonfinancial Debt as
a Percent of GDP
Percent
Percent
.-~
//~
/~
//
/\./
~/
f~Total
-a
wit~4~
2
1
1960
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
1992
I)tian/i4r,dtnted
ffin~iinc
(;rt~.flii1ions
22
Figure 3
Short- and Long-Term Interest Rates
Percent
Quarterly Data
Percent
19485052545658606264666870727476788082848688901992
Periods of business recession are indicated by the shaded areas.
Table 1
The Federal Funds Rate and the Business Cycle
Federal Funds Rates (percent)
At business
cycle peak!
trough
At closest peak
At closest trough
lIl/1957-Il/1958
~24 1 0.94
SAME
SAME
ll/1960-l11961
ait / 2.00
&99 (2)
1.68 (+2)
lV/1969-lV11970
&94 / 5.57
8.98 (I)
3.86 (+1)
IV/1973-111975
10.00 I 6.30
10.57 (1)
5.41 (+1)
1I1980-11111980
15.07 I 9.83
SAME
lll/19814V11982
17.59 / 9.28
17.79 (1)
ass (+1)
lII/1990-llIl99l
8.16 I 5.86
9.73 (5)
~77 (+4)2
Business cycle
peakltrough
SAME
number of quarters earlier () or later (+) in which the closest federal funds rate peak or
trough occurs is indicated in parentheses.
t
Latest data available.
Figure 4
Quarterly Data
Percent
~7
~/K
1~E
~t~V~
)/
~
/
\/
///
~//
p:
4~
K)
-,
4
>>
//
~:
1948 50
]~1~ I~I~I
52
54
56
F~
58
1I
60
I~I
62
64
I~I
66
II
68
70
72
74
76
78
80
82
84
86
88
901992
Long-term spread is the excess of the yield on BAA-rated bonds over AAA-rated bonds.
Short-term spread is the prime rate less the yield on 3-month Treasury bills.
Periods of business recession are indicated by the shaded areas.
6
There is a distinct negative relationship between the prime
rate and CD rate spread in figure 5 and the growth rate of
C&l loans over the (available) sample period 1/1970 to
11/1992. The correlation between these two measures is
-0.43, which is statistically significant at the 1 percent level.
27
Figure 5
Percent
1970717273
Percent
7475767778798081828384858687888990911992
K,)
Figure 6
Quarterly Data
Percent
4
/
~/
r~
K,)
K,)
~,,
4,)
K,
K
K
I,
K
/
,~
~/K,
K),
K)
A,))
A
~,
KK
K)
/
/
KK
T,
7K
KKKK
/ K /
K
)/
KK
OK
/
/
1
A
1970717273747576777879808182
8384858687888990911992
29
(KKt~K)(J)iK)~)%J)
SEPTEMBER/OCTOBER 1992
0)0)
-AK)
Figure 7
Change in Business Inventories
Billions of 1987 dollars
Quarterly Data
100-
100
OAK
KK
Fp K
Ca
75
-cc
~~0
AK
AK,
~~~~~~A,,
~ ,4
4
1959
K,
A
K//
K,K,~
/
K
~9/y
K)/KO)K
K
K
9
7
K~
K
K
,,
K
/fl
K))
4
9/)K)
25
7/4K
K~
25
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
1991
Table 2
The Decline in Inventory Investment in Recessions
Recession
peak-trough
Change in
real Inventory
1
investment
Change in real
GOP
lV/1948-lVI1949
$2a3 billion
$20.9 billion
lll/1953-ll/1954
11.1 (1&4)
37.4 (43.3)
29.7 (42.5)
lll/1957-ll/1958
20.1 (22.5)
44.9 (Sal)
44.8 (42.4)
ll/1960-l/1961
15.7 (45.5)
5.7 (15.8)
275.4 (288.0)
IV/1969-IV/1970
22.5 (19.8)
1.8 (25.0)
1250.0 (79.2)
135.1
Column 1 as
a percent
of column 2
135.4%
IV/1973-I/1975
84.7
l/1980-lll/1980
44.3 (10.7)
97.3 (9a2)
45.5 (10.9)
lll/1981-lV/1982
80.6 (35.0)
104.9 (110.1)
76.8 (31.8)
lll/1990-ll/1991
31.6 (57.9)
65.5 (106.0)
48.2 (54.6)
62.7
Prior to 1960 data are expressed in 1982 dollars From 1960 to the present data are in 1987
dollars, Numbers in parentheses correspond to the data for the respective peak-to-trough periods
for real flOP 11/53-11/54 111/57 (/58 l/60-lV/60 1(1/69 11/70 (/80 1/80 (11/81 111/82 and 11/90-1/91
),,
,,,/
,,K
K)
K,
/4
KKK///,
Figure 8
Business Loans and Business Inventories
Billions of dollars
1959
61
63
Quarterly Data
65
67
69
71
73
75
77
Billions of dollars
79
81
83
85
87
89
1991
Figure 9
Quarterly Changes in Business Inventories and
Business Loans (Percent of GDP)
Percent
Percent
.5
1960
62
64
66
68
70
72
74
76
18
80
82
84
86
88
90
1992
is inventories. The evidence presented here suggests that business loans and business inventory
holdings are very closely related statistically, so
that business loans and inventory move up or
down in tandem. Since businesses typically
reduce their desired inventory holdings during
recessions, business loans at banks tend to
decline as well.
An additional consideration is the recent
movement in interest rates and interest rate
spreads. As in earlier periods of so-called credit
crunches, the recent decline in business loans
has been accompanied by reductions in interest
rates, particularly short-term rates. This behavior
is inconsistent with a shortage of credit from a
simple supply and demand perspective. While
interest rate spreads for risky credit have risen
recently, including the difference between bank
lending and borrowing rates, this is also a normal
cyclical phenomenon. This spread, as well as that
between the prime rate and the three-month
Ileasury bill rate, have not been unusually large
34
_______-
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a:td
_______
- Energy Prices and Short-Run Economic Performance, this Review (January 1981), pp. 3-17.
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cat i:~viiIeiice
The statistical analysis presented here uses variables measured in nominal terms because the credit crunch
hypothesis concerns the effects of nominal bank credit and
the latter finances, in part, nominal inventory. When the
procedures are performed on the same variables measured
in constant-dollar terms, the results are essentially the same
and the conclusions are not altered.
1.85
(2) i1
(1.88)
(6.32)
+ 0.264 L
(3.76)
82
0.55
11
SE.
(3.31)
0.216 L,2
(3.02)
4.200
D.W
1.92
I,~,
1.318 + 0.580
(2.33)
(6.98)
0.067 ~
(0.69)
(3.42)
H2
0.55
(3.96)
SE.
4.189
D.W
1.94