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Journal of Finance Vol. 75 No. 2 2020

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

Atif Mian1,2,3,4,5,6,7; Amir Sufi1,2,3,4,5,6,7; Emil Verner1,8,4

1 Georgetown University · 2 Princeton University · 3 University of Chicago · 4 University College London · 5 University of Maryland, College Park · 6 Columbia University · 7 Danmarks Nationalbank · 8 Washington Center for Equitable Growth

open access

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.

DOI
10.1111/jofi.12869
Volume
75
Issue
2
Pages
949-994
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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