Credit Supply Shocks and Prices: Evidence from Danish Firms
American Economic Journal: Macroeconomics (Forthcoming)
We study the response of firms’ output prices to a cut in credit supply. We combine
data on loans between Danish firms and banks with survey-based producer prices and
transaction-based export unit values. Exploiting banks’ heterogeneous exposure to the
global financial crisis, we show that loans to firms with relationships to exposed banks
drop and lending rates increase. In response, firms raise prices by 3–5%. This effect is
decreasing in the elasticity of firms’ demand but positive for most industrial production.
Our results support the idea that firms use price increases to raise cash when
external sources of liquidity dry up.