Investment Slumps During Financial Crises: The Real Effects of Credit Supply

69 Pages Posted: 30 Jun 2018 Last revised: 3 Jan 2020

Date Written: June 15, 2018

Abstract

To measure the real effects of credit-supply disruptions during financial crises, we develop a quantitative model of firm investment and debt that features firm heterogeneity and financial frictions. We apply this framework to a novel, census-type panel dataset for manufacturing firms and find that the contraction in credit supply during the Greek Depression was responsible for 9-36% of the drop in corporate investment after controlling for changes in investment opportunities and uncertainty. Our empirical framework does not require cross-sectional variation in credit-supply conditions to separate the demand for credit from its supply. This feature is particularly useful for studying financial crises when credit-supply shocks are likely to have a substantial common component. Our model also helps to explore the effectiveness of counterfactual policies of fiscal stimulus or debt forgiveness for boosting corporate investment.

Keywords: credit supply, common shocks, firm investment, financial crises, Greek Depression

JEL Classification: G01, G31, D22, E44

Suggested Citation

Fakos, Alexandros and Sakellaris, Plutarchos and Tavares, Tiago, Investment Slumps During Financial Crises: The Real Effects of Credit Supply (June 15, 2018). Available at SSRN: https://ssrn.com/abstract=3197369 or http://dx.doi.org/10.2139/ssrn.3197369

Alexandros Fakos (Contact Author)

ITAM ( email )

Av. Camino a Santa Teresa 930
Colonia Heroes de Padierna
Mexico City, CDMX 10700
Mexico

HOME PAGE: http://alexfakos.weebly.com/

Plutarchos Sakellaris

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece
+302108203304 (Phone)
+3012108203383 (Fax)

Tiago Tavares

ITAM ( email )

Camino a Santa Teresa No. 930
Col. Héroes de Padierna
Ciudad de México
Mexico

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
115
Abstract Views
748
rank
249,948
PlumX Metrics