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
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: Suggested Citation