The Department of Finance and FRIC, Center for Financial Frictions, are proud to announce the upcoming online seminar with Emil Verner, MIT Sloan School of Management.
Emil Verner will present:
Credit Allocation and Macroeconomic Fluctuations
We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 116 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.
Location and sign up:
This is an online seminar on Zoom.
Please contact us in order to sign up.