We show that supply-side financial shocks have a large impact on firms’ investment. We develop a new methodology to separate firm borrowing shocks from bank supply shocks using a vast sample of matched bank-firm lending data. We decompose aggregate loan movements in Japan for the period 1990–2010 into bank, firm, industry, and common shocks. The high degree of financial institution concentration means that individual banks are large relative to the size of the economy, which creates a role for granular shocks as in Gabaix’s (2011) study. We show that idiosyncratic granular bank supply shocks explain 30–40 percent of aggregate loan and investment fluctuations.

This paper estimates the impact of globalization on markups, and the effect of changing markups on US welfare, in a monopolistic competition model. We work with symmetric translog preferences, which allow for endogenous markups and firm entry and exit, thereby changing product variety. We find that between 1992 and 2005, US import shares rose and US firms exited, leading to an implied fall in markups, while variety went up because of imports. US welfare rose by nearly 1 percent as a result of these changes, with product variety contributing one-half of that total and declining markups the other half.