Bank Shocks and the Debt Structure

29 Pages Posted: 29 Jun 2020 Last revised: 26 Jul 2021

Date Written: June 19, 2021


This paper identifies shocks to bank credit supply based on firms’ aggregate debt composition. I use a model where firms fund production with bonds and loans. Only bank shocks imply opposite movements in the two types of debt as firms adjust their debt composition to new credit conditions. I use this result to inform a sign-restriction VAR and identify the sources of US business cycles. Bank shocks account for a third of output fluctuations and are predictive of the bond spread.

Keywords: Business cycles, financial shocks, firm funding, sign restrictions

JEL Classification: C11, E32, E44, G21

Suggested Citation

Gauthier, David, Bank Shocks and the Debt Structure (June 19, 2021). Available at SSRN: or

David Gauthier (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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