Do Credit Market Shocks Affect the Real Economy? Quasi-Experimental Evidence from the Great Recession and 'Normal' Economic Times

Using comprehensive data on bank lending and establishment-level outcomes from 1997-2011, this paper fails to find evidence in favor of the hypothesis that the small business lending channel is an important determinant of small business or overall economic activity. The shift-share style research design predicts county-level lending shocks using variation in pre-existing bank market shares and estimated bank supply-shifts. The results indicate that counties with negative predicted supply shocks experienced declines in small business loan originations throughout the entire period, indicating that it is costly for these businesses to find new lenders. However, we find that the predicted lending shocks only led to economically small declines in both small firm and overall employment during the Great Recession, and did not affect employment during the 1997-2007 period