Working Paper: NBER ID: w25079
Authors: Stephen G. Cecchetti; Enisse Kharroubi
Abstract: We examine the negative relationship between the rate of growth in credit and the rate of growth in output per worker. Using a panel of 20 countries over 25 years, we establish that there is a robust correlation: the higher the growth rate of credit, the lower the growth rate of output per worker. We then proceed to build a model in which this relationship arises from the fact that investment projects that are more risky have a higher return. As their borrowing grows more quickly over time, entrepreneurs turn to safer, hence lower return projects, thereby reducing aggregate productivity growth. We take this theoretical prediction to industry-level data and find that credit growth disproportionately harms output per worker growth in industries that have either less tangible assets or are more R&D intensive.
Keywords: Credit Growth; Economic Growth; Productivity; Financial Sector
JEL Codes: D92; E22; E44; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credit Growth (O42) | Output per Worker Growth (O49) |
| Credit Growth (O42) | Aggregate Productivity Growth (O49) |
| Credit Growth (O42) | Safer, Lower-Return Projects (G11) |
| Output per Worker Growth (O49) | Aggregate Productivity Growth (O49) |