Identifying Relationship-level Effects Using Covariance Restrictions

Olivier De Jonghe and Daniel Lewis

No 21400, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We propose a novel decomposition to identify relationship-specific effects or shocks in a bipartite network under covariance restrictions. We show existing two-way fixed effects decompositions are ill-suited to correlations consistent with realistic heterogeneity. Our strategy yields a simple consistent estimator. We estimate relationship-level credit demand and supply shocks across nine euro-area countries and three episodes. We find evidence demand and supply each have both firm and bank components, and within-firm/bank shock variation is of comparable scale to between-firm/bank variation. Regressions using firm fixed effects as demand controls are at odds with economic theory, while our method uncovers significant deleterious effects of the post-2022 monetary contraction on exposed firms.

Keywords: Two-way fixed effects model; Demand and supply shocks; corporate credit; Identification; Higher moments; Networks (search for similar items in EconPapers)
JEL-codes: C33 C58 E44 G21 G30 (search for similar items in EconPapers)
Date: 2026-04
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Related works:
Working Paper: Identifying relationship-level effects using convariance restrictions (2026)
Working Paper: Identifying relationship-level effects using covariance restrictions (2026)
Working Paper: Identifying relationship-level effects using covariance restrictions (2026)
Working Paper: Identifying relationship-level effects using covariance restrictions (2026)
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