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Investment slumps during financial crises: The real effects of credit supply

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  • Fakos, Alexandros
  • Sakellaris, Plutarchos
  • Tavares, Tiago

Abstract

Using new census-type data and a dynamic structural model, we study the effect of credit supply on investment by manufacturing firms during the Greek depression. Real factors (profitability, uncertainty, and taxes) account for only a fraction of the substantial drop in investment observed in the data. The reduction in credit supply has significant real effects, explaining 11–32% of the investment slump. We also find that exporting firms, which reduce investment and deleverage despite their improved profitability during the crisis, face a contraction in credit supply similar to that of non-exporters, suggesting that the credit-supply shock has a significant common component.

Suggested Citation

  • Fakos, Alexandros & Sakellaris, Plutarchos & Tavares, Tiago, 2022. "Investment slumps during financial crises: The real effects of credit supply," Journal of Financial Economics, Elsevier, vol. 145(1), pages 29-44.
    • Handle: RePEc:eee:jfinec:v:145:y:2022:i:1:p:29-44
    DOI: 10.1016/j.jfineco.2022.04.004
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G3 - Financial Economics - - Corporate Finance and Governance
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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