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The Credit Crunch and Fall in Employment during the Great Recession

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Abstract

We study the existence and economic significance of bank lending channels that affect employment in U.S. manufacturing industries. In particular, we address the question of how a dramatic worsening of firm and consumer access to bank credit, such as the one observed over the Great Recession, translates into job losses in these industries. To identify these channels, we rely on differences in the degree of external finance dependence and of asset tangibility across manufacturing industries and in the sensitivity of these industries' output to changes in the supply of consumer credit. We show that household access to bank loans matters more for employment than firm access to local bank loans. Our results suggest that, over the recent financial crisis, tightening access to commercial and industrial loans and consumer installment loans explains jointly about a quarter of the drop in employment in the manufacturing sector. In addition, a decrease in the availability of home equity loans explains an extra one-tenth of the drop.

Suggested Citation

  • Samuel Haltenhof & Seung Jung Lee & Viktors Stebunovs, 2014. "The Credit Crunch and Fall in Employment during the Great Recession," Finance and Economics Discussion Series 2014-06, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2014-06
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    More about this item

    Keywords

    Bank credit channels; bank lending standards; home equity extraction; credit crunch; employment; job losses; Great Recession;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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