How do Credit Supply Shocks Affect the Real Economy? Evidence from the United States in the 1980s

Atif Mian, Amir Sufi, Emil Verner

NBER Working Paper No. 23802
Issued in September 2017, Revised in October 2017
NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth, Monetary Economics

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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Document Object Identifier (DOI): 10.3386/w23802

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