A Framework for Analysis of Credit Supply and Demand Shocks: The Case of Bosnia and Herzegovina

The paper uses a novel panel multi-level fixed effects empirical strategy to identify credit supply and demand shocks. The paper shows that banks with positive credit supply shocks on the margin expand their portfolio and engage in a risk-taking behaviour. The selected bank balance sheet variables have meaningful effects on the bank supply shocks. Moreover, the bank supply and demand shocks aggregated at the bank and industry levels have significant effects on the key macroeconomic variables. The author proposes a framework for the implementation of macro prudential and monetary policy based on the estimated credit shocks.