An empirical analysis of loan supply and demand in the euro area

Using a cointegrated vector autoregressive model (CVAR), this paper empirically examines the supply and demand for euro area loans to the non-financial private sector for the sample 1981 to 2017. We distinguish between loan demand and supply and disentangle the impact of the financial crisis on loans from conventional drivers. Applying I(2) cointegration analysis, we find two long run (polynomial) cointegration relations and identify them as loan demand and supply functions. Despite rejecting long-run price homogeneity for euro area loans in the unrestricted model, we identify a stable system with (long-run) loan supply and demand functions based on conventional drivers and housing wealth. In terms of forecasting properties, we show that the loan demand function helps to improve the accuracy of euro area inflation forecasts for horizons of up to 8 quarters ahead and for loan forecasts for horizons of up to 2 quarters ahead, while the loan supply function does not have this property.