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Credit Allocation and Macroeconomic Fluctuations

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  • Karsten Müller
  • 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.

Suggested Citation

  • Karsten Müller & Emil Verner, 2023. "Credit Allocation and Macroeconomic Fluctuations," NBER Working Papers 31420, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:31420
    Note: CF IFM ME
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    Cited by:

    1. Fernández-Gallardo, Álvaro & Lloyd, Simon & Manuel, Ed, 2023. "The transmission of macroprudential policy in the tails: evidence from a narrative approach," Bank of England working papers 1027, Bank of England.
    2. Madalen Castells Jauregui & Dmitry Kuvshinov & Bjoern Richter & Victoria Vanasco, 2024. "Sectoral dynamics of safe assets in advanced economies," Economics Working Papers 1884, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Bo Li, 2024. "Household Leverage Cycle Around the Great Recession," Papers 2407.01539, arXiv.org.
    4. Madalen Castells Jauregui & Dmitry Kuvshinov & Björn Richter & Victoria Vanasco, 2024. "Sectoral Dynamics of Safe Assets in Advanced Economies," Working Papers 1438, Barcelona School of Economics.
    5. Bo Li, 2024. "Testing Business Cycle Theories: Evidence from the Great Recession," Papers 2403.04104, arXiv.org.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F30 - International Economics - - International Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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