The Determinants of Bank Credit in Industrialized Countries: Do Property Prices Matter?

In this study, we analyse the determinants of bank credit to the private non‐financial sector in 16 industrialized countries based on a cointegrating VAR. Cointegration analysis suggests that property prices are an important determinant of the long‐run borrowing capacity of the private sector, which needs to be taken into account to explain the long‐run movements of bank lending. Impulse response analysis reveals that innovations to property prices also have a highly significant and persistent positive dynamic effect on bank lending. This result suggests that innovations to property prices may give rise to significant and persistent cycles in bank lending and are thus a potential explanation for the persistent financial cycles observed in the past.