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

62 Pages Posted: 20 May 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

Date Written: May 19, 2017

Abstract

We explore the 1982 to 1992 business cycle in the United States, exploiting variation across states in the degree of banking deregulation to generate differential local credit supply shocks. We show that expansion in credit supply operates primarily by boosting 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 (May 19, 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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