How Do Credit Supply Shocks Affect the Real Economy? Evidence from the United States in the 1980s
61 Pages Posted: 11 Sep 2017 Last revised: 14 Jan 2023
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How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels
Date Written: September 2017
We study the business cycle consequences of credit supply expansion in the U.S. The 1980's credit boom resulted in stronger credit expansion in more deregulated states, and these states experience a more amplified business cycle. A new test shows that amplification is primarily driven by the local demand rather than the production capacity channel. States with greater exposure to credit expansion experience larger increases in household debt, the relative price of non-tradable goods, nominal wages, and non-tradable employment. Yet there is no change in tradable sector employment. Eventually states with greater exposure to credit expansion experience a significantly deeper recession.
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