On the direct and indirect real effects of credit supply shocks

Abstract

We explore the real effects of bank-lending shocks and how they permeate the economy through buyer-supplier linkages. We combine administrative data on all Spanish firms with a matched bank-firm-loan dataset of all corporate loans from 2003 to 2013 to estimate firm-specific credit supply shocks for each year. We compute firm-specific measures of exposure to bank lending shocks of customers (upstream propagation) and suppliers (downstream propagation). Our findings suggest that credit supply shocks have sizable direct and downstream propagation effects on employment, investment, and output, especially during the 2008–2009 crisis, but no significant impact on employment during the expansion. We provide evidence that both trade credit extended by suppliers and price adjustments in general equilibrium explain downstream propagation of credit shocks.