Working Paper: NBER ID: w31420
Authors: Karsten Møller; Emil Verner
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.
Keywords: credit allocation; macroeconomic fluctuations; financial crises
JEL Codes: E0; F30; G01; G02
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit expansions to the nontradable sector (F49) | subsequent growth slowdowns (O41) |
| credit expansions to the nontradable sector (F49) | higher likelihood of financial crises (F65) |
| credit booms concentrated in nontradable sector (F65) | slower economic growth (F69) |
| credit expansions to the tradable sector (F65) | sustained growth (O44) |
| nontradable credit expansions (E51) | increased financial fragility (F65) |
| nontradable credit expansions (E51) | real estate price growth (R31) |
| real estate price growth (R31) | subsequent busts (Y50) |