The Real Effects of Credit Constraints: Evidence from Discouraged Borrowers in the Euro Area

43 Pages Posted: 26 Aug 2015

See all articles by Annalisa Ferrando

Annalisa Ferrando

European Central Bank (ECB)

Klaas Mulier

Ghent University - Faculty of Economics and Business Administration

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Date Written: August 25, 2015

Abstract

This paper uses a new survey-based data set and a model with strong theoretical under-pinnings to explain the characteristics and behaviour of discouraged borrowers in the euro area. The results show that more borrowers are discouraged when the average interest rate charged by banks in a country is higher. Higher corporate tax rates, on the other hand, lead to lower discouragement. We show that discouragement has strong negative effects on in- vestment growth (-4.7pp), employment growth (-2.7pp) and asset growth (-2.9pp) due to the lack of access to bank finance in the two years following the discouragement. Furthermore, we estimate that the majority of discouraged borrowers would be unable to get a loan if they would apply. Consistent with this low loan approval likelihood, discouraged borrowers tend to be relatively risky firms.

Keywords: Discouraged borrowers, survey data, real effects, static trade-off theory

JEL Classification: G01, G10, G30, G32

Suggested Citation

Ferrando, Annalisa and Mulier, Klaas, The Real Effects of Credit Constraints: Evidence from Discouraged Borrowers in the Euro Area (August 25, 2015). ECB Working Paper No. 1842. Available at SSRN: https://ssrn.com/abstract=2650453

Annalisa Ferrando (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Klaas Mulier

Ghent University - Faculty of Economics and Business Administration ( email )

Ghent, B-9000
Belgium

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