Credit expansions to the non-tradable sector systematically predict growth slowdowns & financial crises; credit expansions to the tradable sector are associated with sustained output & productivity growth without a higher risk of a financial crisis

Credit Allocation and Macroeconomic Fluctuations. Karsten Müller & Emil Verner. NBER Working Paper 31420, Jun 2023. DOI 10.3386/w31420

Abstract: We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 117 countries since 1940. We document that, during credit booms, credit flows disproportionately to the non-tradable sector. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises. In contrast, credit expansions to the tradable sector are associated with sustained output and productivity growth without a higher risk of a financial crisis. To understand these patterns, we show that firms in the non-tradable sector tend to be smaller, more reliant on loans secured by real estate, and more likely to default during crises. Our findings are consistent with models in which credit booms to the non-tradable sector are driven by easy financing conditions and amplified by collateral feedbacks, contributing to increased financial fragility and a boom-bust cycle.