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

See all articles by Atif R. Mian

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

Massachusetts Institute of Technology (MIT) - Sloan School of Management

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Date Written: July 31, 2018

Abstract

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

Suggested Citation

Mian, Atif R. and Sufi, Amir and Verner, Emil, How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels (July 31, 2018). 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

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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