The information banks produce drives their lending decisions and macroeconomic outcomes, but this information is inherently difficult to analyse because it is private. We construct a novel measure of bank information quality from confidential regulatory data that include banks’ private risk assessments for US corporate loans. Information quality improves as local economic conditions deteriorate, particularly for new loans, large loans, and loans with higher expected losses. Information quality also declines during periods of rapid local house price appreciation. Our results provide empirical support for theories of countercyclical information production in credit markets.

The decline of the U.S. manufacturing share since 1960 has occurred disproportionately during recessions. Using evidence from two natural experiments—the collapse of Lehman Brothers in 2008 and U.S. interstate banking deregulation in the 1980s—I find a role for credit reallocation in explaining this phenomenon by showing that losing access to credit disproportionately hurt manufacturing firms, and that the creation of new credit disproportionately benefited nonmanufacturing firms. These results arise endogenously from a model with technology-driven structural change and fixed costs of establishing new financial relationships. The model suggests an important role for long-run industry trajectories in properly accounting for the costs and benefits of policy interventions in credit markets.

While investment in most sectors declines in response to a contractionary monetary policy shock, investment in the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for the universe of US manufacturing firms, I show that this increase is driven by the types of firms which are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms take advantage of the decline in the user cost of capital caused by the monetary contraction, while constrained firms are forced to cut back. Removing firm financial constraints in the model dampens the response of manufacturing output to monetary shocks by about 25%.