Kaiji Chen and Tao Zha

Working Paper 2015-8
August 2015

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We take a structural approach to assessing the empirical importance of shocks to the supply of bank-intermediated credit in affecting macroeconomic fluctuations. First, we develop a theoretical model to show how credit supply shocks can be transmitted into disruptions in the production economy. Second, we use the unique micro-banking data to identify and support the model's key mechanism. Third, we find that the output effect of credit supply shocks is not only economically and statistically significant but also consistent with the vector autogression evidence. Our mode estimation indicates that a negative one-standard-deviation shock to credit supply generates a loss of output by 1 percent.

JEL classification: E32, E44, G21, C51, C81, C82

Key words: intermediation cost, credit supply channel, micro bank-level data, call report, senior loan officers, identification, supply and demand, intermediation costs, endogenous monitoring activities

The authors thank Lars Hansen, Pat Higgins, Vincenzo Quadrini, and Juan Sanchez for helpful discussions. They are grateful to Bill Bassett for supplying us with the microdata. Pat Higgins was instrumental in constructing the series used for this paper, and Tong Xu provided superlative research assistance. This research is supported in part by the National Science Foundation grant no. SES 1127665. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or the National Bureau of Economic Research. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Kaiji Chen, Department of Economics, Emory University, Rich Memorial Building, 1602 Fishburne Drive, Atlanta, GA 30322-2240, kaiji.chen@emory.edu, or Tao Zha, Research Department, Federal Reserve Bank of Atlanta, Emory University, and NBER, 1000 Peachtree St. NE, Atlanta, GA 30309-4470, tao.zha@atl.frb.org.
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