The Long-Run Real Effects of Banking Crises: Firm-Level Investment Dynamics and the Role of Wage Rigidity

68 Pages Posted: 26 Nov 2017

See all articles by Carlo Wix

Carlo Wix

Board of Governors of the Federal Reserve System

Date Written: November 22, 2017

Abstract

This paper studies the long-run effects of credit market disruptions on real firm outcomes and how these effects depend on nominal wage rigidities at the firm level. I trace out the long-run investment and growth trajectories of firms which are more adversely affected by a transitory shock to aggregate credit supply. Affected firms exhibit a temporary investment gap for two years following the shock, resulting in a persistent accumulated growth gap. I show that affected firms with a higher degree of wage rigidity exhibit a steeper drop in investment and grow more slowly than affected firms with more flexible wages.

Keywords: Financial Crises, Bank Lending, Real Effects, Firm Investment, Wage Rigidity, Labor Hoarding

JEL Classification: E22, E24, E51, G01, G21, G31

Suggested Citation

Wix, Carlo, The Long-Run Real Effects of Banking Crises: Firm-Level Investment Dynamics and the Role of Wage Rigidity (November 22, 2017). SAFE Working Paper No. 189. Available at SSRN: https://ssrn.com/abstract=3075810 or http://dx.doi.org/10.2139/ssrn.3075810

Carlo Wix (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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