Third, credit booms can lead to a misallocation of resources away from more productive sectors, as emphasized in, among others, Reis (2013), Benigno and Fornaro (2014), and Borio et al. (2016). Because the level and growth rate of productivity is often higher in tradable industries, a reallocation away from tradables can cause lower aggregate productivity growth in the medium run. We show that, consistent with this idea, credit growth to the non-tradable and household sectors predicts lower future labor productivity and total factor productivity. In contrast, growth in lending to the tradable sector is associated with higher productivity growth.
The Takeaway: Who Borrows Matters
Taken together, the patterns we document suggest that credit expansions are not created equally. Instead, they highlight that “good” and “bad” booms can be differentiated based on what the borrowed money is used for along dimensions emphasized by economic theory. Beyond comparing household and corporate debt, differentiating between different varieties of firm credit expansions is important. This analysis reveals that housing credit is not the only source of financial stability risks; non-tradable services also matter. Our results provide a new perspective on the contrasting results in the literature emphasizing the benefits of credit for growth (Levine 2005) and studies linking credit booms to medium-term growth slowdowns. An important policy implication is that regulations aimed at curbing lending as a whole may risk restricting the types of credit associated with positive future economic outcomes.
Karsten Müller (@KMuellerEcon) is a Postdoctoral Research Associate at the Julis-Rabinowitz Center for Public Policy and Finance at Princeton University. More details about his research can be found on his website: https://www.karstenmueller.com/.
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