Why credit booms go bad

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:


Psssssst :  How to know united bank of india customer id?

Benigno, G. and L. Fornaro (2014, January). The Financial Resource Curse. Scandinavian Journal of Economics 116(1), 58–86.

Borio, C., E. Kharroubi, C. Upper, and F. Zampolli (2016, January). Labour Reallocation and Productivity Dynamics: Financial Causes, Real Consequences. BIS Working Papers 534.

Brunnermeier, M. K. and Y. Sannikov (2014, February). A Macroeconomic Model with a Financial Sector. American Economic Review 104(2), 379–421.

Geanakoplos, J. (2010). The Leverage Cycle. In NBER Macroeconomics Annual 2009, Volume 24, NBER Chapters, pp. 1–65. National Bureau of Economic Research.

Gorton, G. and G. Ordoñez (2019, 01). Good Booms, Bad Booms. Journal of the European Economic Association 18(2), 618–665.

He, Z. and A. Krishnamurthy (2013, April). Intermediary Asset Pricing. American Economic Review 103(2), 732–70.

Jordà, Ò., M. Schularick, and A. M. Taylor (2013). Sovereigns Versus Banks: Credit, Crises, and Consequences. Working Paper Series 2013–37.

Kalantzis, Y. (2015, 03). Financial Fragility in Small Open Economies: Firm Balance Sheets and the Sectoral Structure. Review of Economic Studies 82(3), 1194–1222.

Levine, R. (2005, 00). Finance and Growth: Theory and Evidence. In P. Aghion and S. Durlauf (Eds.), Handbook of Economic Growth, Volume 1 of Handbook of Economic Growth, Chapter 12, pp. 865–934. Elsevier.

Mian, A. R., A. Sufi, and E. Verner (2017). Household Debt and Business Cycles Worldwide. Quarterly Journal of Economics.

Reis, R. (2013). The Portuguese Slump and Crash and the Euro Crisis. Brookings Papers on Economic Activity, 143–193.

Schmitt-Grohé, S. and M. Uribe (2016). Downward Nominal Wage Rigidity, Currency Pegs, and Involuntary Unemployment. Journal of Political Economy 124(5), 1466–1514.

Schneider, M. and A. Tornell (2004). Balance Sheet Effects, Bailout Guarantees and Financial Crises. Review of Economic Studies 71(3), 883–913.

Psssssst :  Best answer: How the bank works in india?

Schularick, M. and A. M. Taylor (2012, April). Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008. American Economic Review 102(2), 1029–61.

Source :

Back to top button