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Report
How much do bank shocks affect investment? Evidence from matched bank-firm loan data
We show that supply-side financial shocks have a large impact on firms' investment. We do this by developing a new methodology to separate firm-borrowing shocks from bank supply shocks using a vast sample of matched bank-firm lending data. We decompose loan movements in Japan for the period 1990 to 2010 into bank, firm, industry, and common shocks. The high degree of financial institution concentration means that individual banks are large relative to the size of the economy, which creates a role for granular shocks as in Gabaix (2011). As a result, bank supply shocks?that is, movements in ...
Discussion Paper
Credit, Income, and Inequality
Access to credit plays a central role in shaping economic opportunities of households and businesses. Access to credit also plays a crucial role in helping an economy successfully exit from the pandemic doldrums. The ability to get a loan may allow individuals to purchase a home, invest in education and training, or start and then expand a business. Hence access to credit has important implications for upward mobility and potentially also for inequality. Adverse selection and moral hazard problems due to asymmetric information between lenders and borrowers affect credit availability. Because ...
Report
Tuition, Debt, and Human Capital
This paper investigates the effects of college tuition on student debt and human capital accumulation. We exploit data from a random sample of undergraduate students in the United States and implement a research design that instruments for tuition with relatively large changes to the tuition of students who enrolled at the same school in different cohorts. We find that $10,000 in higher tuition causally reduces the probability of graduating with a graduate degree by 6.2 percentage points and increases student debt by $2,961. Higher tuition also reduces the probability of obtaining an ...
Working Paper
Financial Development and International Trade
This paper studies the industry-level and aggregate implications of financial development on international trade. I set up a multi-industry general equilibrium model of international trade with input-output linkages and heterogeneous firms subject to financial frictions. Industries differ in capital-intensity, which leads to differences in external finance dependence. The model is parameterized to match key features of firm-level data. Financial development leads to substantial reallocation of international trade shares from labor- to capital-intensive industries, with minor effects at the ...
Working Paper
Revisiting Gertler-Gilchrist Evidence on the Behavior of Small and Large Firms
Gertler and Gilchrist (1994) provide evidence for the prevailing view that adverse shocks are propagated via credit constraints of small firms. We revisit the behavior of small versus large firms during the episodes of credit disruption and recessions in the sample extended to cover the 2007-09 economic crisis. We find that large firms'' short-term debt and sales contracted relatively more than those of small firms during the 2007-09 episode. Furthermore, the short-term debt of large firms also contracted relatively more in the previous tight money episodes if one takes into account the ...
Report
Credit and Income Inequality
How does credit access for small business owners affect income inequality? A bank’s cutoff rule, employed in the decision to grant loans and based on applicants’ credit scores, provides us with the exogenous variation needed to answer this question. Analyzing uniquely detailed loan application data, we find that application acceptance increases recipients’ income five years later by more than 10 percent compared to denied applicants. This effect is mostly driven by upward mobility of poor individuals, especially if credit-constrained, thereby reducing income inequality among those who ...
Essay
Older Americans Faced Early Pandemic Credit Constraints
Older Americans saw debt fall early in the pandemic, but also their existing credit curtailed and new credit denied at greater rates than younger consumers.
Working Paper
The effects of changes in local-bank health on household consumption
This study investigates the relationship between credit availability and household consumption using a novel approach to separate credit demand and supply. We find that a deterioration in local bank health reduces household consumption, with the strongest effects occurring for households that are more likely to need credit—especially those experiencing a negative income shock and having limited liquid assets. The main contributions of the study are the use of an arguably exogenous measure of local bank health and multifaceted indicators of constrained households. Our findings contribute to ...
Working Paper
The effects of changes in local-bank health on household consumption
Focusing on localized measures of bank health and economic activity, and renters as well as homeowners, this paper uses an innovative approach to identifying households likely in need of credit to investigate the effect on household spending of a deterioration in local-bank health. The analysis shows that local-bank health tends to impact the expenditures of renters more than homeowners, with the strongest effects for households that likely need credit?those experiencing a negative income shock and having limited liquid wealth. These findings contribute to the discussion of the linkages ...
Discussion Paper
Do Bank Shocks Affect Aggregate Investment?
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 ...