Credit availability and investment: Lessons from the “great recession”

The paper argues that the traditional difficulty encountered in finding evidence on the effects of credit availability on economic activity depends on the fact that these effects are powerful but rare and vary with the cycle. The global financial crisis offers an opportunity to test this assumption. The paper exploits a unique dataset, including direct information on credit rationing for 1200 Italian firms over the last twenty years. We find that the elasticity of a firm's investment to the availability of bank credit has been significant in periods of economic contraction, but not in other periods (the ability to tap alternative sources of finance may arguably explain this result) and that during the global crisis the impact of credit quantity constraints on Italian investment in manufacturing was significant.

► The effects of credit availability on economic activity are studied. ► The assumption that these effects vary with the cycle is tested. ► A dataset including 1200 Italian firms over the last twenty years is exploited to this purpose. ► The availability of bank credit affects investment during contractions, not in other periods. ► During the great recession of 2008-2009 credit availability significantly affected Italian investment.