Banks have tightened credit standards substantially over the past year. The quarterly survey of banks indicates that the number of banks tightening credit standards has declined, but remains positive. Banks have reported that their liquidity position has helped to ease credit constraints very recently. While private-sector demand for credit has slowed down, public-sector demand has accelerated.
A key feature of the model is that there are two distinct types of demand shocks: labor demand shocks and product demand shocks. The labor demand shocks reflect factors such as adverse credit conditions and increased uncertainty that lead firms to demand fewer workers at a given real wage.