Investment Slumps During Financial Crises: The Role of Credit Constraints
72 Pages Posted: 30 Jun 2018
Date Written: June 15, 2018
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: Suggested Citation