Credit Allocation and Macroeconomic Fluctuations

Karsten Müller and Emil Verner

No 31420, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 117 countries since 1940. We document that, during credit booms, credit flows disproportionately to the non-tradable sector. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises. In contrast, credit expansions to the tradable sector are associated with sustained output and productivity growth without a higher risk of a financial crisis. To understand these patterns, we show that firms in the non-tradable sector tend to be smaller, more reliant on loans secured by real estate, and more likely to default during crises. Our findings are consistent with models in which credit booms to the non-tradable sector are driven by easy financing conditions and amplified by collateral feedbacks, contributing to increased financial fragility and a boom-bust cycle.

JEL-codes: E0 F30 G01 G02 (search for similar items in EconPapers)
Date: 2023-06
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-his, nep-ifn and nep-opm
Note: CF IFM ME
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Journal Article: Credit Allocation and Macroeconomic Fluctuations (2024)
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