External Shocks, Bank Lending Spreads, and Output Fluctuations

This paper studies the effects of external shocks on bank lending spreads and output fluctuations in Argentina during the early 1990s. The first part presents the analytical framework. The second presents a VAR model that relates bank lending spreads, the cyclical component of output, the real lending rate, and the external interest rate spread. Impulse response functions show that a positive shock in external spreads leads to higher domestic spreads and lower output. Historical decompositions show that shocks to external spreads in the immediate aftermath of the Mexican peso crisis had a sizable effect on movements in output and domestic spreads. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.