Working Paper: NBER ID: w23802
Authors: Atif Mian; Amir Sufi; Emil Verner
Abstract: We study the business cycle consequences of credit supply expansion in the U.S. The 1980's credit boom resulted in stronger credit expansion in more deregulated states, and these states experience a more amplified business cycle. A new test shows that amplification is primarily driven by the local demand rather than the production capacity channel. States with greater exposure to credit expansion experience larger increases in household debt, the relative price of non-tradable goods, nominal wages, and non-tradable employment. Yet there is no change in tradable sector employment. Eventually states with greater exposure to credit expansion experience a significantly deeper recession.
Keywords: Credit Supply Shocks; Business Cycles; Deregulation; Local Demand; Production Capacity
JEL Codes: E32; E44; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit supply expansion in the 1980s (E65) | stronger credit growth in more deregulated states (G28) |
| stronger credit growth in more deregulated states (G28) | more amplified business cycle (E32) |
| credit supply shocks (E51) | higher loading on aggregate factors (C43) |
| credit supply shocks (E51) | decrease in state-level idiosyncratic volatility (C32) |
| credit supply expansion (E51) | increase in household debt (G51) |
| increase in household debt (G51) | severity of the recession (F44) |
| banking sector problems and household debt overhang (G21) | deeper recession in early deregulation states (L51) |
| local demand channel (R22) | increase in nontradable sector employment (J49) |
| local demand channel (R22) | no change in tradable sector employment (F16) |
| production capacity channel (D24) | enhance labor productivity and employment in financially constrained sectors (E69) |