Credit market frictions and their direct effects on U.S. manufacturing fluctuations

Abstract

In this paper, we explore how informational frictions in credit markets directly affect U.S. manufacturing fluctuations. Within the context of a dynamic industry model, we propose a strategy for identifying intermediation costs related to informational asymmetries between lenders and borrowers. The analysis suggests that these costs have been steadily falling over the post-war period. We also present evidence that changes in the cost of intermediation should directly affect output, as opposed to just propagating the effects of other shocks. In particular, we find that shocks to the cost of intermediation account for a larger share of manufacturing output fluctuations at long horizons than at short horizons.