Jin Cao (Norges Bank) - Banks, Firms, and Households: Credit Shock Amplification and Real Effects

Research seminars

Research Seminar - Jin Cao (Norges Bank) - Banks, Firms, and Households: Credit Shock Amplification and Real Effects

Co-author: Cédric Huylebroek (KU Leuven & Norges Bank)

Abstract
While a large literature has examined how bank credit shocks affect firms or households, it has not accounted for the fact that such shocks may simultaneously impact both. In this paper, we overcome this limitation and disentangle the real impact of a credit market disruption into the effect of firm-side credit shocks, individual-side credit shocks, and their interaction. To this end, we construct a novel dataset linking Norwegian employees to their employers and their respective bank relationships. We show that individuals’ labor income and consumption decline by 1–2% when only they or only their employer face a credit shock, compared to the benchmark where neither do. However, when individuals and their employer simultaneously face a credit shock, labor income and consumption decline by nearly 6%, revealing a strong amplification effect. This amplification arises because personal credit constraints hinder individuals’ consumptio smoothing and job search when confronted with wage cuts or layoffs triggered by their employer’s credit constraints. Our findings suggest that this mechanism also shapes the aggregate transmission of credit shocks.

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