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Measuring Credit Demand and Supply: A Bayesian Model with an Application to Greece (2003–2011)

Abstract Motivated by the linkage between credit and growth in the Greek economy and the deceleration of credit since the financial crisis, this paper studies the evolution of credit demand and supply in Greece during the period 2003M1–2011M3. A model of the credit market is explored which disentangles demand and supply. A Bayesian estimation methodology with data augmentation for the latent variables is proposed. The analysis is carried out separately for each type of loan (short- and long-term business loans, consumer loans and mortgages) enabling the comparative study of the credit rationing and supply constraint effects across loan categories. The results indicate that, for all loan categories, excess demand characterized the boom period. After the intensification of the debt crisis, long-term business loans, consumer loans and mortgages were constrained from the supply side, however, demand for short-term business loans has slowed down more than supply, reflecting businesses’ need for stable funding. Finally, the structural effects of the crisis are investigated. The present paper aims to contribute to the strand of literature investigating the tools to analyse credit developments by formulating an enhanced and flexible version of a model which disentangles credit demand and supply and enables the monitoring of the evolution of financial imbalances.