Do Credit Market Shocks Affect the Real Economy? Quasi-Experimental Evidence from the Great Recession and 'Normal' Economic Times
University of Chicago - Department of Economics; Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)
Department of Economics and Woodrow Wilson School, Princeton University; National Bureau of Economic Research (NBER)
Hoai-Luu Q. Nguyen
Massachusetts Institute of Technology (MIT)
November 15, 2014
MIT Department of Economics Working Paper No. 12-27
We estimate the effect of the reduction in credit supply that followed the 2008 financial crisis on the real economy. We predict county lending shocks using variation in pre-crisis bank market shares and estimated bank supply-shifts. Counties with negative predicted shocks experienced declines in small business loan originations, indicating that it is costly for these businesses to find new lenders. Using confidential microdata from the Longitudinal Business Database, we find that the 2007-2009 lending shocks accounted for statistically significant, but economically small, declines in both small firm and overall employment. Predicted lending shocks affected lending but not employment from 1997-2007.
Number of Pages in PDF File: 47
Keywords: Great Recession, bank lending, employment, small businesses
JEL Classification: D22, D53, G01, G1, G21, J01, J23working papers series
Date posted: December 10, 2012 ; Last revised: November 22, 2014
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