When Credit Dries Up: Job Losses in the Great Recession

The Great Recession has renewed interest in the real effects of credit supply shocks. In this paper we use a unique dataset to estimate job losses from credit constraints in Spain by exploiting differences in banks' health at the onset of the crisis. Due to solvency problems, many banks in Spain have been intervened during the Great Recession. We show that these banks reduced credit supply more than the other banks and to analyze the real effects we compare employment changes and firm exits from 2006 to 2010 at two groups of firms: firms that received a significant share of their funding from intervened banks and those who received their funding from healthier banks. Once selection biases are controlled for our most conservative estimates imply that firms attached to weak banks suffered an additional fall in employment between 3.5 and 5 percentage points.