The Real Effects of Credit Crunch in the Great Recession: Evidence from Italian Provinces

The paper estimates the effects on the real economy of the sharp reduction in the supply of credit following the 2008 financial crisis. We develop a measure of local credit supply that is based on the market shares of the banks that serve a local economy and the national change in each bank’s lending that is attributable to supply factors (i.e. purged of local demand factors). The decrease in our credit supply indicator, which is strongly correlated to the growth of outstanding loans, accounts for 13 per cent of the contraction in real value added with respect to the pre-crisis period. The negative effects also concern employment, although to a lesser extent. The real effects of the credit crunch are concentrated on small firms and in the areas that are more dependent upon external finance. Finally, credit supply shocks affected lending but not real outcomes in the pre-crisis period.