Working Paper Series no. 132: The Impact of Stock Market Shocks on Credit in France since the mid-1990s

Abstract

This study attempts to distinguish, in the impact on credit in France, between the effects of stock market shocks occurred since the mid-1990s and more traditional effects, stemming from the business cycle. To do so, it uses a model focused on two financial assets: loans and equities. According to the simulations of this model, companies in France appear much more sensitive than households to stock market shocks. Wealth effects seem to have a fairly limited impact on loans to households. However, the balance sheet structure effect appears to be largely responsible for the expansion of loans to companies. The rise in stock prices in the latter half of the 1990s seems to have sharply increased companies' equity capital, thus allowing them to increase their leverage. The bursting of the equity bubble as of mid-2000 then appears to have contracted this positive credit gap but it was not entirely offset in 2004.

John Baude
September 2005

Classification JEL : E51, G11.

Keywords : credit, shares, stock market shocks.