Credit Allocation and Macroeconomic Fluctuations

140 Pages Posted: 18 Feb 2021 Last revised: 27 Oct 2021

See all articles by Karsten Müller

Karsten Müller

NUS Business School

Emil Verner

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

Date Written: October 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 the sectoral allocation of credit matters for distinguishing between “good” and “bad” credit booms. We test the prediction that lending to households and the non-tradable sector, relative to the tradable sector, contributes to macroeconomic boom-bust cycles by (i) fueling unsustainable demand booms, (ii) increasing financial fragility, and (iii) misallocating resources across sectors. We show that credit to non-tradable sectors, including construction and real estate, is associated with a boom-bust pattern in output, similar to household credit booms. Such lending booms also predict elevated financial crisis risk and productivity slowdowns. In contrast, tradable-sector credit expansions are followed by stable output and productivity growth without a higher risk of a financial crisis. Our findings highlight that what credit is used for is important for understanding macro-financial linkages.

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

Suggested Citation

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

Karsten Müller (Contact Author)

NUS Business School

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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