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Financial frictions and employment during the Great Depression

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  • Benmelech, Efraim
  • Frydman, Carola
  • Papanikolaou, Dimitris

Abstract

We provide new evidence that a disruption in credit supply played a quantitatively significant role in the unprecedented contraction of employment during the Great Depression using a novel, hand-collected dataset of large industrial firms. Our identification strategy exploits preexisting variation in the need to raise external funds at a time when public bond markets essentially froze. Local bank failures inhibited firms’ ability to substitute public debt for private debt, which exacerbated financial constraints. We estimate a large and negative causal effect of financing frictions on firm employment. We find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933.

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  • Benmelech, Efraim & Frydman, Carola & Papanikolaou, Dimitris, 2019. "Financial frictions and employment during the Great Depression," Journal of Financial Economics, Elsevier, vol. 133(3), pages 541-563.
  • Handle: RePEc:eee:jfinec:v:133:y:2019:i:3:p:541-563
    DOI: 10.1016/j.jfineco.2019.02.005
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    More about this item

    Keywords

    Credit; Financial constraints; Labor; Unemployment; Great Depression;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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