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Does bank lending affect output? evidence from the U.S. states

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John C. Driscoll

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Abstract

This paper uses a panel of state-level data to test whether changes in bank loan supply affect output. Since the U.S. states are small open economies with fixed exchange rates, state-specific shocks to money demand are automatically accommodated, leading to changes in lending if banks rely on deposits as a source of funding. Using these shocks as an instrumental variable, I find that shocks to money demand have large and statistically significant effects on the supply of bank loans, but loans have small, often negative, and statistically insignificant effects on output.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-31.

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Date of creation: 2003
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Handle: RePEc:fip:fedgfe:2003-31

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Related research
Keywords: Bank loans ; Income;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March. [Downloadable!] (restricted)
  3. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June. [Downloadable!] (restricted)
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  4. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-99, May. [Downloadable!] (restricted)
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  5. Claudia M. Buch, 2000. "Financial Market Integration in the US: Lessons for Europe?," Kiel Working Papers 1004, Kiel Institute for the World Economy. [Downloadable!]
  6. Jeffrey A. Miron & Christina D. Romer & David N. Weil, 1995. "Historical Perspectives on the Monetary Transmission Mechanism," NBER Working Papers 4326, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
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  8. Christina D. Romer & David H. Romer, 1990. "New Evidence on the Monetary Transmission Mechanism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990-1), pages 149-214. [Downloadable!]
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  16. Wang, Hung-Jen, 2001. "Production Smoothing When Bank Loan Supply Shifts: The Role of Variable Capacity Utilization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 749-66, August.
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  18. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 40-58, February. [Downloadable!] (restricted)
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  19. Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series 93-5, Board of Governors of the Federal Reserve System (U.S.).
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  20. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November. [Downloadable!] (restricted)
Full references

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Adam B. Ashcraft, 2003. "Are banks really special? New evidence from the FDIC-induced failure of healthy banks," Staff Reports 176, Federal Reserve Bank of New York. [Downloadable!]
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  2. Burton A. Abrams & Margaret Z. Clarke & Russell F. Settle, 2003. "Do Banks Matter? A Credit View Model for Small Open Economies," Working Papers 03-13, University of Delaware, Department of Economics. [Downloadable!]
  3. Hugh Rockoff & John Landon-Lane, 2006. "A Companion to "The Origin and Diffusion of Shocks to Regional Interest Rates in the United States, 1880-2002."," Departmental Working Papers 200608, Rutgers University, Department of Economics. [Downloadable!]
  4. Claudia M. Buch, 2000. "Financial Market Integration in the US: Lessons for Europe?," Kiel Working Papers 1004, Kiel Institute for the World Economy. [Downloadable!]
  5. Fabian Valencia, 2008. "Banks' Precautionary Capital and Credit Crunches," IMF Working Papers 08/248, International Monetary Fund. [Downloadable!]
  6. John Landon-Lane & Hugh Rockoff, 2004. "Monetary Policy and Regional Interest Rates in the United States, 1880-2002," NBER Working Papers 10924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Young, Andrew & Higgins, Matthew & Levy, Daniel, 2006. "Heterogeneous Convergence," MPRA Paper 954, University Library of Munich, Germany. [Downloadable!]
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  8. Claudia M. Buch, 2001. "Financial Market Integration in a Monetary Union," Kiel Working Papers 1062, Kiel Institute for the World Economy. [Downloadable!]
  9. Masami Imai, 2008. "Crowding-Out Effects of a Government-Owned Depository Institution: Evidence from a Natural Experiment in Japan," Wesleyan Economics Working Papers 2008-003, Wesleyan University, Department of Economics. [Downloadable!]
  10. Anil K. Kashyap & Jeremy C. Stein, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June. [Downloadable!] (restricted)
  11. Martin Cihák & Petya Koeva Brooks, 2009. "From Subprime Loans to Subprime Growth? Evidence for the Euro Area," IMF Working Papers 09/69, International Monetary Fund. [Downloadable!]
  12. Masami Imai & Seitaro Takarabe, 2009. "Bank Integration and Local Credit Cycle:Evidence from Japan," Wesleyan Economics Working Papers 2009-002, Wesleyan University, Department of Economics. [Downloadable!]
  13. Burton A. Abrams & Russell F. Settle, 2007. "Do Fixed Exchange Rates Fetter Monetary Policy? A Credit View," Eastern Economic Journal, Eastern Economic Association, vol. 33(2), pages 193-205, Spring. [Downloadable!]
  14. Matthew J. Higgins & Daniel Levy & Andrew T. Young, 2005. "Growth and Convergence across the U.S.: Evidence from County-Level Data," Emory Economics 0529, Department of Economics, Emory University (Atlanta). [Downloadable!]
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  15. Ryan R. Brady, 2007. "Consumer Credit, Liquidity and the Transmission Mechanism of Monetary Policy," Departmental Working Papers 20, United States Naval Academy Department of Economics. [Downloadable!]
  16. Teruyoshi Kobayashi, 2008. "Incomplete Interest Rate Pass-Through and Optimal Monetary Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 77-118, September. [Downloadable!]
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