Lucciano Villacorta, Banco Central de Chile

Paper: Unobserved Heterogeneity in the Bank Lending Channel: Accounting for interactions and Bank Specialization

Abstract: The bank lending channel is heterogeneous across firms. Using matched bank-firm lending data, we develop a framework that identifies firm-demand and bank-supply credit shocks. Bank shocks are allowed to have heterogeneous effects across (unobserved) firm groups, in a setup in which group membership is left unrestricted. We decompose credit growth dynamics into time-varying firm and time-varying bank-group effects, where grouping minimizes a least-squares criterion. Our results show significant heterogeneity in the bank lending channel: i) the effect of bank shocks varies considerably across the identified firm groups, ii) we quantify the importance of bank-firm relationships: aggregate credit growth drops by up to 20% when bank-firm relationships are randomly allocated, iii) the impact of bank shocks on firm investment is not significant and imprecisely estimated when homogeneity in the bank lending channel is assumed, while it is precisely estimated to
an elasticity of 4 when heterogeneous effects are allowed.