Investment Slumps During Financial Crises: The Role of Credit Constraints

72 Pages Posted: 30 Jun 2018

Date Written: June 15, 2018

Abstract

How much do credit constraints contribute to investment slumps during financial crises? For the Greek crisis that erupted in 2010, we find that tightened credit constraints contributed to about half of the observed collapse in investment rates. The remainder is explained by diminished demand and productivity facing the firms. We use a novel census-type dataset of manufacturing firms and show that standard dynamic investment models abstracting from credit constraints cannot reproduce the observed investment dynamics. Enhanced with borrowing constraints subject to an aggregate shock to eligible collateral, such models can account for the observed collapse in investment rates.

Keywords: Financial Crises, Investment Slumps, Leverage, Greek Crisis, Greece, Firm Heterogeneity

JEL Classification: D22, D25, E22, E27, G01, G32, L60

Suggested Citation

Fakos, Alexandros and Sakellaris, Plutarchos and Tavares, Tiago, Investment Slumps During Financial Crises: The Role of Credit Constraints (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, DF 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

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