Credit Supply Shocks, Network Effects, and the Real Economy

by Laura Alfaro, Manuel García, and Enrique Moral-Benito

Overview — Using data for Spain between 2003 and 2013, this study examines firms’ responses to credit supply shocks during times of boom (expansion) and bust (financial crisis and recession). Results indicate that propagation of these shocks through the Spanish production network doubles the magnitude of the real effects typically estimated in the literature. This study also shows how such effects vary greatly during booms and busts.

Author Abstract

We consider the real effects of bank lending shocks and how they permeate the economy through buyer-supplier linkages. We combine administrative data on all firms in Spain with a matched bank-firm-loan dataset incorporating information on the universe of corporate loans for 2003–2013. Using methods from the matched employer-employee literature for handling large data sets, we identify bank-specific shocks for each year in our sample. Combining the Spanish input-output structure and firm-specific measures of upstream and downstream exposure, we construct firm-specific exogenous credit supply shocks and estimate their direct and indirect effects on real activity. Credit supply shocks have sizable direct and downstream propagation effects on investment and output throughout the period but no significant impact on employment during the expansion period. Downstream propagation effects are quantitatively larger in magnitude than direct effects. The results corroborate the importance of network effects in quantifying the real effects of credit shocks and show that real effects vary during booms and busts.