Abstract
AbstractIn this article, we review the rapidly growing literature on the real effects of banks' corporate credit supply. We cover recent methodological advances and provide an in‐depth survey of the existing evidence. The literature consistently shows that credit supply contractions lead to adverse real outcomes, but economic magnitudes vary across samples and identification strategies. This variation has become smaller in more recent work, using highly granular data. We further document heterogeneity in firm outcomes and show that the evidence is more ambiguous for expansionary shocks. Our analysis allows us to identify current knowledge gaps and worthwhile avenues for future research.
Highlights
The question of how fluctuations in banks' credit supply affect real economic activity has interested economists at least since the Great Depression
Firm (-time) fixed effects to control for credit demand One of the most important contributions in this stream of research comes from Gan (2007) and Khwaja and Mian (2008), both of whom identify credit supply shocks using firm fixed effects, loan-level data, and a natural experiment
After documenting how banks transmit shocks to firms, we present the evidence on how shocks translate into real effects for borrowers
Summary
The question of how fluctuations in banks' credit supply affect real economic activity has interested economists at least since the Great Depression. In this strand of the literature, Gan (2007) and Khwaja and Mian (2008) were the first to isolate credit supply by examining how banks with different exposure to adverse shocks change their lending toward the same borrower (the firm-time fixed effects approach).
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