Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/250735 
Year of Publication: 
2021
Series/Report no.: 
Working Papers No. 21-18
Publisher: 
Federal Reserve Bank of Boston, Boston, MA
Abstract: 
Credit availability from different sources varies greatly across firms and has firm-level effects on investment decisions and aggregate effects on output. We develop a theoretical framework in which firms decide endogenously at the extensive and intensive margins of different funding sources to study the role of firm choices on the transmission of credit supply shocks to the real economy. As in the data, firms can borrow from different banks, issue bonds, or raise equity through retained earnings to fund productive investment. Our model is calibrated to detailed firm- and loan-level data and reproduces stylized empirical facts: Larger, more productive firms rely on more banks and more sources of funding; smaller firms mostly rely on a small number of banks and internal funding. Our quantitative analysis shows that bank credit supply shocks lead to a sizable reduction in aggregate output, with substantial heterogeneity across firms, due to the lack of substitutability among alternative credit sources. Finally, we show that our insights have important implications for the validity of standard empirical methods used to identify credit supply effects (Khwaja and Mian 2008).
Subjects: 
credit supply shocks
firm financing
bank-firm matching
shock transmission
JEL: 
E32
E43
E50
G21
G32
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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