Small and Medium Size Enterprises, Credit Supply Shocks, and Economic Recovery in Europe

IMF Working Papers, June 10, 2014

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Limited access to bank credit in recent years increased pressure on small and medium size enterprises (SMEs), forcing them to scale down investment plans and production.
The paper explores the macroeconomic implications of SME credit constraints and finds that countries with high prevalence of SMEs tended to recover more slowly from the global financial crisis than their peers.
A VAR estimation demonstrates that a negative credit supply shock applied to SMEs has an adverse effect on economic activity, and this impact is amplified in countries that have a high share of SMEs.

Countries with high prevalence of SMEs experienced slower recoveries from the global financial crisis relative to peers with lower SME prevalence.
Negative credit supply shocks targeted at SMEs reduce economic activity as shown by a Panel VAR estimation.
The adverse macroeconomic impact of SME credit supply shocks is larger in economies with a higher share of SMEs.

Empirical approach: VAR estimation (Panel VAR) to identify effects of negative credit supply shocks to SMEs on economic activity.
Comparative analysis across countries by prevalence/share of SMEs to assess amplification of effects.

Interaction of economic structure (SME prevalence) and access to bank financing plays a critical role in episodes of economic recovery.
Policies that address SME access to bank credit could influence the pace of aggregate economic recovery following financial shocks.

Subjects: Bank credit, Banking, Credit, Economic growth, Economic recovery, Economic theory, Financial institutions, Loans, Money, Supply shocks
Keywords: Bank credit, Credit, credit supply shock, Credit Supply Shocks, Economic Recovery, Europe, Global, lending standard, Loans, Panel VAR, prevalence of SME, SMEs, SMES loan, SMES prevalence, SMES sector, SMES share, SMES' employment, Supply shocks, WP

IMF Working Paper No. 2014/098