How much did the contraction in the supply of credit to households contribute to the decline in employment during the Great Recession? To answer this question I provide new estimates of: (1) the elasticity of employment with respect to household credit; and (2) the size of the supply shock to household credit. I exploit a county’s exposure to the collapse of a large and previously healthy lender as a natural experiment. This gives an estimated elasticity of employment with respect to household credit of 0.3, caused by declines in both housing and non-housing demand. To estimate the size of the credit supply shock, I use non-parametric methods to identify lender-speciﬁc supply-side shocks, which I then aggregate into a simple measure of credit supply shocks to counties. Combining this measure with estimates of the elasticity of employment with respect to the measure, I calculate that shocks to household credit were responsible for at least a 3.6% decline in employment from 2007 to 2010.
|Original language||English (US)|
|Publisher||Social Science Research Network (SSRN)|
|Number of pages||82|
|State||Published - Dec 16 2014|