Credit Allocation and Macroeconomic Fluctuations

152 Pages Posted: 18 Feb 2021 Last revised: 20 Jun 2022

See all articles by Karsten Müller

Karsten Müller

National University of Singapore

Emil Verner

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

Date Written: June 18, 2021


We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 117 countries starting in 1940. Theory predicts that lending to the non-tradable sector, relative to the tradable sector, reflects relaxations in credit supply and contributes to boom-bust cycles by increasing financial fragility. We show that, during credit booms, credit flows disproportionately to the non-tradable sector, consistent with an important role for easy financing conditions. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises, similar to household credit expansions. In contrast, lending to the tradable sector coincides with strong output and productivity growth without a higher risk of a financial crisis. Our findings illustrate that heterogeneity in firm credit is important for understanding macro-financial linkages and distinguishing between “good” and “bad” credit expansions.

Keywords: credit booms, credit allocation, growth, banking crises

JEL Classification: E2, G01, G2, F3

Suggested Citation

Müller, Karsten and Verner, Emil, Credit Allocation and Macroeconomic Fluctuations (June 18, 2021). Available at SSRN: or

Karsten Müller (Contact Author)

National University of Singapore

15 Kent Ridge Dr

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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