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The persistence of a banking crisis

Huber, Kilian (2015) The persistence of a banking crisis. CEP Discussion Paper (1389). Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

This paper analyses the effects of bank lending on GDP and employment. Following losses on international financial markets in 2008/09, a large German bank cut its lending to the German economy. I exploit variation in dependence on this bank across counties. To address the correlation between county GDP growth and dependence on this bank, I use the distance to the closest of three temporary, historic bank head offices as instrumental variable. The results show that the effects of the lending cut were persistent, and resembled the growth patterns of developed economies during and after the Great Recession. For two years, the lending cut reduced GDP growth. Thereafter, affected counties remained on a lower, parallel trend. The firm results exhibit similar dynamics, and show that the lending cut primarily affected capital expenditures. Overall, the lending cut reduced aggregate German GDP in 2012 by 3.9 percent and employment by 2.3 percent. This shows that a single bank can persistently shape macroeconomic growth.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2015 The Author
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HF Commerce
JEL classification: D - Microeconomics > D2 - Production and Organizations
D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation)
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
G - Financial Economics > G0 - General
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
J - Labor and Demographic Economics > J0 - General > J01 - Labor Economics: General
J - Labor and Demographic Economics > J2 - Time Allocation, Work Behavior, and Employment Determination and Creation; Human Capital; Retirement > J23 - Employment Determination; Job Creation; Demand for Labor; Self-Employment
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General
O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output (Income) Convergence
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 14 Jan 2016 16:59
Last Modified: 30 Jan 2019 12:24
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/65010

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