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

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 deposi...

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Bibliographic Details
Published in:Journal of monetary economics 2004-04, Vol.51 (3), p.451-471
Main Author: Driscoll, John C
Format: Article
Language:English
Subjects:
Bank lending
Banks
Credit
Demand for money
Federal states
Finance
Monetary economics
Money demand
U.S. states
U.S.A
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Summary: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.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2004.01.001