Credit relationships between banks and firms depend, among other things, on the relationships that each bank has with other firms and that each firm has with other banks. Overlooking these interdependencies can lead to distortions in the estimation of the effects of shocks on the supply of credit to firms. This paper proposes a new estimation methodology that addresses this problem, based on the same information commonly used in the literature.
Using numerical simulations and data from the Italian Central Credit Register, this paper shows that ignoring the interdependencies in the credit market can distort - upwards or downwards - the estimates of the effects of shocks on the supply of loans to businesses. We apply the proposed new method to study the impact of an increase in interest rates on the supply of credit and find much smaller effects than with standard methodologies.
