52 Pages Posted: 10 Dec 2012 Last revised: 26 Sep 2015
Date Written: September 2015
This paper uses comprehensive data on bank lending and establishment-level outcomes from 1997-2011 to test whether changes in small business bank lending affect the real economy. The shift-share style research design predicts county-level lending shocks using variation in pre-existing bank market shares and estimated bank supply-shifts. 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. Using confidential microdata from the Longitudinal Business Database, we find the predicted lending shocks led to statistically significant, but economically small, declines in both small firm and overall employment during the Great Recession, but did not affect employment during the 1997-2007 period. Overall, this paper’s evidence fails to support the hypothesis that the small business lending channel is an important determinant of economic activity.
Keywords: Great Recession, bank lending, employment, small businesses
JEL Classification: D22, D53, G01, G1, G21, J01, J23
Suggested Citation: Suggested Citation
Greenstone, Michael and Mas, Alexandre and Nguyen, Hoai-Luu Q., Do Credit Market Shocks Affect the Real Economy? Quasi-Experimental Evidence from the Great Recession and 'Normal' Economic Times (September 2015). Available at SSRN: https://ssrn.com/abstract=2187521 or http://dx.doi.org/10.2139/ssrn.2187521