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How Do Credit Supply Shocks Affect the Real Economy? Evidence from the United States in the 1980s

65 Pages Posted: 20 May 2017 Last revised: 25 Aug 2017

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER

Amir Sufi

University of Chicago - Booth School of Business; NBER

Emil Verner

Princeton University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2017

Abstract

Does an expansion in credit supply affect the economy by increasing productive capacity, or by boosting demand? We design a test to uncover which of the two channels is more dominant, and we apply it to the United States in the 1980s where the degree of banking deregulation generated differential local credit supply shocks across states. The stronger expansion in credit supply in early deregulation states primarily boosted local demand, especially by households, as opposed to improving labor productivity of firms. States with a more deregulated banking sector see a large relative increase in household debt from 1983 to 1989, which is accompanied by an increase in the price of non-tradable relative to tradable goods, an increase in wages in all sectors, an increase in non-tradable employment, and no change in tradable employment. Credit supply shocks lead to an amplified business cycle, with GDP, employment, residential investment, and house prices increasing by more in early deregulation states during the expansion, and then subsequently falling more during the recession of 1990 and 1991. The worse recession outcomes in early deregulation states appear to be related to downward nominal wage rigidity, household debt overhang, and banking sector losses.

Keywords: credit supply, deregulation, banking, productivity

Suggested Citation

Mian, Atif R. and Sufi, Amir and Verner, Emil, How Do Credit Supply Shocks Affect the Real Economy? Evidence from the United States in the 1980s (August 24, 2017). Available at SSRN: https://ssrn.com/abstract=2971086 or http://dx.doi.org/10.2139/ssrn.2971086

Atif R. Mian

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Sufi (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Emil Verner

Princeton University - Department of Economics ( email )

Princeton, NJ
United States

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