How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels

Abstract

Credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. In this study, we develop a test to determine if the household demand channel is present, and we implement the test using both a natural experiment in the United States in the 1980s and an international panel of 56 countries over the last several decades. Consistent with the importance of the household demand channel, we find that credit supply expansion boosts nontradable sector employment and the price of nontradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle and lead to more severe recessions.

Softening the Blow: U.S. State-Level Banking Deregulation and Sectoral Reallocation after the China Trade Shock

“…These countries are Australia, Denmark, Finland, Germany, Japan, New Zealand, Spain, and Switzerland 9 With the exception of Iowa, all states had deregulated both interstate banking and intrastate branching laws by 1995. Iowa liberalized intrastate branching only in 1997.10 Our measurement of state financial openness is consistent with the deregulation measures used in Hoffmann and Stewen (2020) andMian et al (2020). In fact, our main results are robust to using these alternative measures of financial openness.…”

Softening the blow: US state-level banking deregulation and sectoral reallocation after the China trade shock

“…To address the first concern, our vector of control variables includes a range of interactions of ∆IE l t with other pre-sample state-level characteristics that could correlate cross-sectionally with DI s(l) , such as the growth rates of tradable and non-tradable GDP, employment, wages, and the house price growth in the decade before 1991. Specifically, a broad literature has documented the impact of banking deregulation in the 1980's on economic growth and the correlation of business cycles (Morgan, Rime and Strahan, 2004), trade (Michalski and Ors, 2012), the relative size of tradable and non-tradable sectors, and the growth rate of consumer credit (Mian et al, 2020) as well as firm creation. We summarize these pre-sample state-level characteristics in the vector PRE s .…”

Close encounters of the European kind: Economic integration, sectoral heterogeneity and structural reforms

“…Gehringer (2015) examines the effect of financial market regulation on both the manufacturing and the services sector. We 16 One of the clearest gains from joining the euro area may arise from the creation of deeper and more liquid financial markets (Bael et al, 2004;Mian et al 2019).…”