Credit Reallocation and Bank Competition
[Draft available upon request]
This paper examines how competition among banks affects the allocation of credit across firms. I exploit the staggered interstate bank deregulation across U.S. states during the 1980s and 1990s to estimate the dynamics of credit flow responses to this policy shock using local projection. The results show a large increase in short-term credit creation immediately following an increase in bank competition, peaking at around 70 percent relative to the mean. However, short-term credit destruction peaks one year later. These results differ from earlier findings because I construct a more precise measure of policy-induced bank competition. Further analysis reveals that the long-term credit reallocation is primarily driven by larger and older firms.
Heterogeneous Effects of Economic Policy Uncertainty on Corporate Credit Growth
with Ana María Herrera, Elena Pesavento, and Timothy Bianco
[Draft available upon request]
This paper studies how economic policy uncertainty affects firm-level credit and sales growth, allowing responses to differ across types of firms. Using quarterly Compustat data, we employ a two-step estimator that first sorts firms into groups via k-means clustering on size, leverage, liquidity, and distance-to-default, and then estimates group-specific impulse responses using local projections. The algorithm identifies four economically distinct firm types: High Liquidity, High Leverage, Large, and Small. We find that an increase in economic policy uncertainty raises net credit growth for High Liquidity firms and lowers it for High Leverage firms, and these differences are statistically significant and persist for one year. Sales growth, by contrast, falls across all four groups on impact, with much less cross-group heterogeneity. The results are robust to alternative numbers of groups and alternative sets of clustering variables.