Credit supply shocks significantly aggravate the impact of economic recessions. Understanding
the underlying reasons why credit market shocks occur and detecting the market turbulences
in time can give a decision support tool for the economic policy to intervene more
efficiently on the market and to reduce the effect of economic downturns. The goal
of the current article is to investigate the factors that signal possible credit shocks
by analyzing the quarterly data of 17 European countries over the period 1995–2021.
The focus of the article is on the credit given to the nonfinancial corporations.
In our analysis, we have built on the credit gap methodology by determining the deviations
of the lending activity from its trend, and then we have modeled these credit gaps
using fundamental macroeconomic indicators, such as the balance of the current account,
the ratio of short‐ and long‐term capital investments and government debt. Our conclusion
is that in the presence of fundamental disequilibrium in the economy excessive lending
creates positive credit gaps that increase the chance of negative credit market shocks.
According to our new findings, the existing credit gap methodology can be improved
by incorporating real economic factors; slowing long‐term capital investment and increasing
the deficit of the current account signal the emergence of a credit gap. We found
significant regional heterogeneity as in Southern European countries, and the credit
gaps were more substantial. Among the investigated macroeconomic factors, the governmental
indebtedness was especially high in these countries suggesting that countries with
high public debt rates are more prone to develop credit gaps.
