Does bank lending affect output? Evidence from the US states

This paper uses a panel of state-level data to test whether changes in bank loan Supply affect Output. Since the U.S. states are small open economics with fixed exchange rates, state-specific shocks to money demand are automatically accommodated, leading to changes in lending if banks rely on deposits as a source of funding. Using, these shocks as in instrumental variable, I find that shocks to money demand have large and statistically significant effects on the supply of bank loans, but loans have small, often negative and statistically insignificant effects on output. (C) 2004 Elsevier B.V. All rights reserved.