Does Credit Crunch Investments Down? New Evidence on the Real Effects of the Bank-Lending Channel

Abstract:

This paper shows evidence on the real effects of the bank lending channel exploiting the dramatic 2007 liquidity drought in interbank markets as a source of variation in banks’ credit supply. For a large sample of Italian firms we combine information on firm-bank credit relationships, firms and banks balance sheet data, and estimate both the direct effect of the liquidity drought on the investment rate and the sensitivity to bank credit of investment (as well as of other firms outcomes) in 2007-10. We find that pre-crisis exposure to the interbank markets does predict banks subsequent credit supply, and has a significant direct impact on firms investment rate. Credit shocks have a significant impact on broader economic activity, lowering firms’ value added, employment and intermediate inputs purchases; we also find evidence of its propagation through a contraction in the supply of trade credit by firms.