Networks Webinar - Fernando Vega-Redondo (University Carlos III of Madrid)

Abstract: The paper shows empirically that bank credit shocks to firms propagate upstream and downstream along the production network. Both first-order and higher-order network effects are equally important, and upstream propagation is stronger than downstream propagation. Our identification strategy relies on: (i) administrative matched datasets from Spain on supplier-customer transactions and bank loans; (ii) a standard operationalization of bank credit-supply shocks during the Global Financial Crisis; and (iii) a general equilibrium model of an interfirm production network economy with financial frictions that is structurally estimated. Our results indicate that the network propagation leads to a 50% increase in the aggregate effects of bank-credit supply shocks on GDP growth.