Productivity Slowdown and Firm Exit: The Ins and Outs of Banking Crises

Andreea Rotarescu
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Andreea Rotarescu: Wake Forest University, Department of Economics

No 129, Working Papers from Wake Forest University, Economics Department

Abstract: This paper studies the adverse long-term impact of declining bank health on aggregate productivity. I develop a simple model of productivity-enhancing investment where firm exposure to fragile banks leads to losses on both the intensive and extensive margins. The model highlights the existence of a bias in measuring observable TFP growth during episodes of heightened firm exits. To address this bias, I construct an exit-adjusted measure of productivity growth using data on Spanish firm-bank relationships and bank bailouts from 2007-2017 and use this measure to quantify the output loss from bank distress. The identification of the exit bias exploits regional variation in weak-bank density. A counterfactual analysis shows that, a decade after the banking crisis, output growth from the extensive margin recovers but the intensive margin proves much more persistent. Together, these dynamics amount to a cumulative loss of 3% of pre-crisis GDP over ten years.

Keywords: Banking Crises; Firm Investment; Aggregate Productivity; Endogenous Exit; Sample Selection (search for similar items in EconPapers)
JEL-codes: E22 G01 G21 G33 (search for similar items in EconPapers)
Pages: 58
Date: 2025-07
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Persistent link: https://EconPapers.repec.org/RePEc:ris:wfuewp:021681

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