Investment Slumps During Financial Crises: The Real Effects of Credit Supply
74 Pages Posted: 30 Jun 2018 Last revised: 29 Apr 2022
Date Written: April 24, 2022
Using new census-type data and a dynamic structural model, we study the effect of credit supply on investment by manufacturing firms during the Greek depression. Real factors (profitability, uncertainty, and taxes) account for only a fraction of the substantial drop in investment observed in the data. The reduction in credit supply has significant real effects, explaining 11--32% of the investment slump. We also find that exporting firms, which reduce investment and deleverage despite their improved profitability during the crisis, face a contraction in credit supply similar to that of non-exporters, suggesting that the credit-supply shock has a significant common component.
Keywords: credit supply, firm investment, financial crises, Greek depression
JEL Classification: G01, G31, D22, E44
Suggested Citation: Suggested Citation