Banking Networks and Economic Growth: From Idiosyncratic Shocks to Aggregate Fluctuations

103 Pages Posted: 2 Dec 2021

See all articles by Shohini Kundu

Shohini Kundu

University of California, Los Angeles (UCLA) - Anderson School of Management

Nishant Vats

University of Chicago Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2021

Abstract

This paper explores the transmission of non-capital shocks through banking networks. We develop a methodology to construct non-capital (idiosyncratic) shocks, using labor productivity shocks to large firms. We document a change in the relationship between foreign idiosyncratic shocks and domestic economic growth between 1978 and 2000. Contemporaneous changes in banking integration drive this phenomenon as geographically diversified banks divert funds away from economies experiencing negative shocks towards other unaffected economies. Our GIV estimates suggest that a 1% increase in bank loan supply is associated with a 0.05-0.26 pp increase in economic growth. Lastly, this can potentially explain the Great Moderation.

Keywords: credit, cross-border spillovers, deregulation, financial intermediation, growth, idiosyncratic shocks, the Great Moderation

JEL Classification: E32, E44, F36, G21, G28, O47, R11, R12

Suggested Citation

Kundu, Shohini and Vats, Nishant, Banking Networks and Economic Growth: From Idiosyncratic Shocks to Aggregate Fluctuations (December 1, 2021). ESRB: Working Paper Series 2021/128, Available at SSRN: https://ssrn.com/abstract=3975942 or http://dx.doi.org/10.2139/ssrn.3975942

Shohini Kundu (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Nishant Vats

University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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