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Banking networks and economic growth: from idiosyncratic shocks to aggregate fluctuations

Author

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  • Vats, Nishant
  • Kundu, Shohini

Abstract

This paper explores the transmission of non-capital shocks through banking networks. We develop a methodology to construct non-capital (idiosyncratic) shocks, using labor productivity shocks to large firms. We document a change in the relationship between foreign idiosyncratic shocks and domestic economic growth between 1978 and 2000. Contemporaneous changes in banking integration drive this phenomenon as geographically diversified banks divert funds away from economies experiencing negative shocks towards other unaffected economies. Our GIV estimates suggest that a 1% increase in bank loan supply is associated with a 0.05-0.26 pp increase in economic growth. Lastly, this can potentially explain the Great Moderation. JEL Classification: E32, E44, F36, G21, G28, O47, R11, R12

Suggested Citation

  • Vats, Nishant & Kundu, Shohini, 2021. "Banking networks and economic growth: from idiosyncratic shocks to aggregate fluctuations," ESRB Working Paper Series 128, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:2021128
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    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrb.wp128~b4df0dc70d.en.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kundu, Shohini, 2023. "The externalities of fire sales: evidence from collateralized loan obligations," ESRB Working Paper Series 141, European Systemic Risk Board.

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    More about this item

    Keywords

    credit; cross-border spillovers; deregulation; financial intermediation; growth; idiosyncratic shocks; the Great Moderation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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