Credit Allocation and Macroeconomic Fluctuations

96 Pages Posted: 18 Feb 2021 Last revised: 5 Jul 2023

See all articles by Karsten Müller

Karsten Müller

National University of Singapore

Emil Verner

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

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Date Written: July 5, 2023


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 since 1940. We document that, during credit booms, credit flows disproportionately to the non-tradable sector. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises. In contrast, credit expansions to the tradable sector are associated with sustained output and productivity growth without a higher risk of a financial crisis. To understand these patterns, we show that firms in the non-tradable sector tend to be smaller, more reliant on loans secured by real estate, and more likely to default during crises. Our findings are consistent with models in which credit booms to the non-tradable sector are driven by easy financing conditions and amplified by collateral feedbacks, contributing to increased financial fragility and a boom-bust cycle.

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 (July 5, 2023). 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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