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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Does Bank Lending Affect Output? Evidence from the U.S. States
John C. Driscoll

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.

Keywords: Bank lending, U.S. states, money demand, credit

Full paper (217 KB PDF)

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Last update: August 11, 2003