The Extent and Efficiency of Credit Reallocation During Economic Downturns

Koji Sakai () and Iichiro Uesugi
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Koji Sakai: Faculty of Economics, Kyoto Sangyo University, Motoyama Kamigamo Kita-ku, Kyoto 603-8047, Japan
Iichiro Uesugi: Institute of Economic Research, Hitotsubashi University, 2-1 Naka-Kunitachi, Tokyo 186-8603, Japan

JRFM, 2024, vol. 17, issue 12, 1-39

Abstract: The theoretical literature on credit reallocation has yielded conflicting predictions on both the extent and the efficiency of reallocations during economic downturns. We borrowed the methodology of measuring job reallocation to measure credit reallocation and examine which predictions are consistent with the data. We reported the following findings: (1) the extent of credit reallocation is smaller in recessions than in expansions, which is attributable to the decreasing extent of credit creation; (2) this tendency was more pronounced during the Lost Decade of the 1990s; (3) credit reallocation generally is efficiency-enhancing, but at a lower rate in recessions and turns to efficiency-reducing during the Lost Decade, possibly due to financial assistance by banks to large but low-quality firms (e.g., through zombie lending). These findings indicate that the inefficient credit reallocation during the Lost Decade was characterized by efficiency-reducing reallocation to large firms.

Keywords: loan market; productivity; financial institutions; credit creation; credit destruction (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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