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

  • John C. Driscoll

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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