Credit Allocation and Macroeconomic Fluctuations

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• Karsten Müller (Princeton University)
• Thursday 26 November 2020, 13:00-14:00
• Online.

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We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit. Constructed from more than 600 sources, these data allow us to map the sectoral allocation of credit across 116 countries starting in 1940 while matching data on total credit from existing sources. Equipped with this new resource, we document a striking shift in the composition of credit away from primary and manufacturing sectors toward households, construction, real estate, and other non-tradable sectors over the past five decades. Motivated by several salient case studies, including the Eurozone and Japanese banking crises, we then ask whether the allocation of firm credit across different industries plays a role in macroeconomic fluctuations. We find stark differences between different varieties of corporate credit expansions. In particular, we show that lending to the construction, real estate, and non-tradable sectors are associated with a boom-bust pattern in output and elevated financial crisis risk, similar to household credit booms. In contrast, there is no such pattern for tradable-sector credit expansions, which are often followed by stronger output growth. These patterns reject models in which debt plays a uniform role and instead support the idea that pre-determined differences across sectors shape interactions between finance and the real economy.

This talk is part of the Cambridge Finance Workshop Series series.

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