The dynamic behavior of business loans and the prime rate : A comment

In a recent paper published in this Journal, Kling uses a vector autoregressive model to study the market for bank loans in the United States. The paper's analytical method — consisting of reduced form estimation, orthogonal transformation of the residuals and ‘innovation’ analysis — suffers, however, from certain methodological difficulties that put its results and suggested interpretations into question. The purpose of this note is to enlighten the nature of these problems through a simple example, and to show that the evidence presented by the author is not sufficient to resolve them.