Do Credit Supply Shocks Affect Employment in Middle-Income Countries?

This paper studies the effect of bank credit supply shocks on for-mal employment in Mexico using a proprietary dataset containing information on all loans extended to firms by commercial banks during 2010-2015. We find large impacts on the formal employment of small and medium firms: a positive credit shock of 1 standard deviation increases yearly employment by 1.4 percentage points. The shares of uncollateralized credit and credit received by family firms, younger firms, and firms with no previous bank relationships also increase, suggesting that credit shocks may play a more prom-inent role for employment creation in credit-constrained settings. (JEL D22, G21, G32, J23, L25, M51, O16)