Southern Methodist University and Federal Reserve Bank of Dallas

In this paper, we attempt to identify the separate contributions of credit demand, supply of \u85nancial intermediation, and supply of funds to uctuations indicators of credit conditions and to uctuations in economic activity. We estimate a common factor model in which the six factors correspond to supply of funds, \u85 nancial inter-mediation, credit demand, aggregate uncertainty, real economic activity, and ination. We use a simple model of \u85nancial intermediation to motivate restrictions on the factor loadings designed to identify supply of funds, uncertainty, credit demand and \u85nancial intermediation factors. We \u85nd that the supply of funds and \u85nancial intermediation factors explain most of the variation in interest rates spreads, while the \u85nancial inter-mediation and credit demand factors typically contribute to most of the uctuations in credit quantity variables. For credit indicators, the 2007-08 \u85nancial crisis appears to be largely due to a decline in the \u85nancial intermediation. However, this decline in nancial intermediation seems to have originated from output and uncertainty shocks, rather than shocks to \u85nancial intermediation itself. JEL classi\u85cation: E44 E51 C32 Many thanks to Nick Bloom and William Dunkelberg for supplying their data. We also thank Tim Fuerst, Kundan Kishore, and Peter VanderHart as well as seminar participants at the June 2010 Western Economic Association Meetings and the February 2011 Eastern Economic Association Meetings for helpful comments and suggestions. The views expressed in this paper are solely those of the authors and not those of the Federal Reserve Bank of Dallas or the Federal Reserve System