Uncertainty and credit conditions: Non-linear evidence from firm-level data

The financial frictions channel highlights the importance of credit conditions for the transmission of rising uncertainty. Using German firm-level survey data for the period 2003 to 2015, we document that a surge in a firm's business uncertainty worsens its credit conditions. Particularly, we demonstrate that this effect depends on the level of uncertainty: low uncertainty nearly triples the effect compared to high uncertainty episodes. To provide an interpretation, we consider a process in which a firm's credit conditions are driven by banks' expectations about the future level of business uncertainty. Increases in uncertainty serve as a signal to update these expectations. Calibrating such a process using our dataset generates a stronger revision of expectations and a larger deterioration of credit conditions under low uncertainty.