Discussion Paper

Do Bank Shocks Affect Aggregate Investment?

Abstract: Traditionally, we have thought of the fates of specific banks as perhaps symptomatic of problems in the financial market but not as causal determinants of fluctuations in aggregate investment and other real economic activity. However, the high level of bank concentration in much of the OECD (Organisation for Economic Co-operation and Development) means that large amounts of lending are channeled through a small number of institutions that are no longer small even in comparison to the largest economies. Consequently, problems in a few large institutions could potentially have a large impact on aggregate lending and on real output. Our study of Japanese lending markets is the first to provide a causal link between bank shocks and firm-level investment rates. The results indicate that 40 percent of aggregate lending and investment volatility over the past two decades can be tied to the idiosyncratic successes and failures of financial institutions.

Keywords: credit constraints; granular shocks; financual markets;

JEL Classification: E2;G2;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2013-07-08

Number: 20130708