Monetary Transmission and the Propagation of the Great Recession

Abstract:
Did banks worsen the economic contraction during the Great Recession? We study home-equity lending during this period and document that banks’ ability to provide effective intermediation between borrowers and lenders not only decreased dramatically but also differed importantly across cities in the US. Higher costs of intermediation made credit more expensive and harder to obtain in cities already harmed by the recession. We find that this hindered monetary transmission, worsen the allocation of credit, and increased the length and depth of the crisis through a contraction of local demand. Our preliminary results indicate that this channel could have important implications for the speed of recovery and for the study of between-city inequality.