How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels
57 Pages Posted: 20 May 2017 Last revised: 5 Aug 2018
Date Written: July 31, 2018
Credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. This study develops an empirical test to determine which channel dominates and implements the test using both a natural experiment in the United States in the 1980s based on banking deregulation and an international panel of 56 countries over the last several decades. In support of the household demand channel, credit supply expansion boosts household debt, non-tradable sector employment, and the price of non-tradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle, leading to more severe recessions.
Keywords: credit supply, deregulation, banking, productivity
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