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Credit Supply Shocks During a Non-Financial Recession

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Abstract

We study the drivers and real effects of credit supply shocks during a major non-financial recession, the COVID-19 crisis. Using data on the universe of bank loans in Mexico, we isolate the supply-driven component of credit variations. Credit supply conditions deteriorated in this period, driven by banks' heightened risk aversion. Using matched employer-employee records, we find that negative credit supply shocks reduced firms' employment and increased their exit probability. These effects are larger among financially constrained firms and workers with lower separation costs. In the aggregate, negative credit shocks account for one-third of the total employment decline for small firms.

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  • Carlo Alcaraz & Nicolas Amoroso & Rodolfo Oviedo Moguel & Alex Rivadeneira & Brenda Samaniego de la Parra & Horacio Sapriza, 2025. "Credit Supply Shocks During a Non-Financial Recession," Working Paper 25-11, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:102097
    DOI: 10.21144/wp25-11
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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