Download Free How Do Credit Supply Shocks Affect The Real Economy Book in PDF and EPUB Free Download. You can read online How Do Credit Supply Shocks Affect The Real Economy and write the review.

We study the impact of bank credit on firm productivity. We exploit a matched firm-bank database covering all the credit relationships of Italian corporations, together with a natural experiment, to measure idiosyncratic supply-side shocks to credit availability and to estimate a production model augmented with financial frictions. We find that a contraction in credit supply causes a reduction of firm TFP growth and also harms IT-adoption, innovation, exporting, and adoption of superior management practices, while a credit expansion has limited impact. Quantitatively, the credit contraction between 2007 and 2009 accounts for about a quarter of observed the decline in TFP.
Does an expansion in credit supply affect the economy by increasing productive capacity, or by boosting demand? We design a test to uncover which of the two channels is more dominant, and we apply it to the United States in the 1980s where the degree of banking deregulation generated differential local credit supply shocks across states. The stronger expansion in credit supply in early deregulation states primarily boosted local demand, especially by households, as opposed to improving labor productivity of firms. States with a more deregulated banking sector see a large relative increase in household debt from 1983 to 1989, which is accompanied by an increase in the price of non-tradable relative to tradable goods, an increase in wages in all sectors, an increase in non-tradable employment, and no change in tradable employment. Credit supply shocks lead to an amplified business cycle, with GDP, employment, residential investment, and house prices increasing by more in early deregulation states during the expansion, and then subsequently falling more during the recession of 1990 and 1991. The worse recession outcomes in early deregulation states appear to be related to downward nominal wage rigidity, household debt overhang, and banking sector losses.
We estimate the effect of the sharp reduction in credit supply following the 2008 financial crisis on the real economy. The identification strategy relies on the substantial heterogeneity in the degree to which banks cut lending over this period. Specifically, we predict changes in county-level small business lending over 2007-2009 by estimating the national change in each bank's lending that is attributable to supply factors (e.g., due to differences in the crisis' effect on their balance sheets) and, subsequently, allocating this quantity to counties based on the banks' pre-crisis market shares. We find that in 2008, 2009, and 2010, this measure is highly predictive of total county-level small business loan originations indicating that, at least in the near term, a firm cannot easily find a new lender if its bank limits access to credit. Additionally, we find that areas with more exposure to banks that cut small business lending during this period experience depressed employment and business formation. Upper bound estimates suggest that the 2007-2009 decline in small business lending accounted for up to 20% of the decline in employment in firms with less than 20 employees, 16% of the total employment loss, and 30% of the decline in inflation adjusted aggregate wages during this period. Finally, we note that the relationship between lending supply and economic activity is not evident in the 1997-2007 period, underscoring the unique circumstances during the Great Recession.
Using comprehensive data on bank lending and establishment-level outcomes from 1997-2011, this paper fails to find evidence in favor of the hypothesis that the small business lending channel is an important determinant of small business or overall economic activity. The shift-share style research design predicts county-level lending shocks using variation in pre-existing bank market shares and estimated bank supply-shifts. The results indicate that counties with negative predicted supply shocks experienced declines in small business loan originations throughout the entire period, indicating that it is costly for these businesses to find new lenders. However, we find that the predicted lending shocks only led to economically small declines in both small firm and overall employment during the Great Recession, and did not affect employment during the 1997-2007 period.
We consider the real effects of bank lending shocks and how they permeate the economy through buyer-supplier linkages. We combine administrative data on all firms in Spain with a matched bank-firm-loan dataset incorporating information on the universe of corporate loans for 2003-2013. Using methods from the matched employer-employee literature for handling large data sets, we identify bank-specific shocks for each year in our sample. Combining the Spanish Input-Output structure and firm-specific measures of upstream and downstream exposure, we construct firm-specific exogenous credit supply shocks and estimate their direct and indirect effects on real activity. Credit supply shocks have sizable direct and downstream propagation effects on investment and output throughout the period but no significant impact on employment during the expansion period. Downstream propagation effects are quantitatively larger in magnitude than direct effects. The results corroborate the importance of network effects in quantifying the real effects of credit shocks and show that real effects vary during booms and busts.
We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.
Recent studies show that uncertainty shocks have quantitatively important effects on the real economy. This paper examines one particular channel at work: the supply of credit. It presents a model in which a bank, even if managed by risk-neutral shareholders and subject to limited liability, can exhibit self-insurance, and thus loan supply contracts when uncertainty increases. This prediction is tested with the universe of U.S. commercial banks over the period 1984-2010. Identification of credit supply is achieved by looking at the differential response of banks according to their level of capitalization. Consistent with the theoretical predictions, increases in uncertainty reduce the supply of credit, more so for banks with lower levels of capitalization. These results are weaker for large banks, and are robust to controlling for the lending and capital channels of monetary policy, to different measures of uncertainty, and to breaking the dataset in subsamples. Quantitatively, uncertainty shocks are almost as important as monetary policy ones with regards to the effects on the supply of credit.
We consider the real effects of bank lending shocks and how they permeate the economy through buyer-supplier linkages. We combine administrative data on all firms in Spain with a matched bank-firm-loan dataset on the universe of corporate loans for 2003-2013 to identify bank-specific shocks for each year using methods from the matched employer-employee literature. Combining firm-specific measures of upstream and downstream exposure, we construct firm-specific exogenous credit supply shocks and estimate their direct and indirect effects on real activity. Credit supply shocks have sizable direct and downstream propagation effects on investment and output throughout the period but no significant impact on employment during the expansion period. Downstream propagation effects are comparable or even larger in magnitude than direct effects. The results corroborate the importance of network effects in quantifying the real effects of credit shocks and show that real effects vary during booms and contractions.
This paper examines the importance of credit market shocks in driving global business cycles over the period 1988:1-2009:4. We first estimate common components in various macroeconomic and financial variables of the G-7 countries. We then evaluate the role played by credit market shocks using a series of VAR models. Our findings suggest that these shocks have been influential in driving global activity during the latest global recession. Credit shocks originating in the United States also have a significant impact on the evolution of world growth during global recessions.