Keywords: Bank lending, U.S. states, money demand, credit
Abstract: 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.
Full paper (217 KB PDF)
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Last update: August 11, 2003