Credit Supply Shocks and Prices: Evidence from Danish Firms†

We study the response of firms’ output prices to a cut in credit supply. We combine data on loans between Danish firms and banks with survey-based producer prices and transaction-based export unit values. Exploiting banks’ heterogeneous exposure to the global financial crisis, we show that loans to firms with relationships to exposed banks drop and lending rates increase. In response, firms raise prices by 3–5 percent. This effect is decreasing in the elasticity of firms’ demand but positive for most industrial production. Our results show that firms increase prices to raise cash when external sources of liquidity dry up.