Does Bank Lending Affect Output? Evidence from the U.S. States

29 Pages Posted: 22 Sep 2003  

John C. Driscoll

Federal Reserve Board

Date Written: July 2003

Abstract

This paper uses a panel of state-level data to test whether changes in bank loan supply affect output. Since the U.S. states are small open economies with fixed exchange rates, state-specific shocks to money demand are automatically accommodated, leading to changes in lending if banks rely on deposits as a source of funding. Using these shocks as an instrumental variable, I find that shocks to money demand have large and statistically significant effects on the supply of bank loans, but loans have small, often negative and statistically insignificant effects on output.

Keywords: Bank lending, U.S. states, money demand, credit

JEL Classification: E32, E41, E51

Suggested Citation

Driscoll, John C., Does Bank Lending Affect Output? Evidence from the U.S. States (July 2003). FEDS Working Paper No. 2003-31. Available at SSRN: https://ssrn.com/abstract=436584 or http://dx.doi.org/10.2139/ssrn.436584

John C. Driscoll (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/john-c-driscoll.htm

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