XXVI Edition

14-15-16 December 2017"

Misallocation and the Credit Cycle: Evidence from Europe

Franco Guido, University of Rome Tor Vergata

Using a large firm level dataset, that covers 18 European countries in the 2006-2014 period, I develop an empirical approach in order to study whether and to what extent the credit cycle influences the efficient allocation of resources. I document that a higher availability of credit leads to a decline in both capital and labor misallocation, suggesting that, when credit is above its trend, the additional funds flowing in the economy reduce financial frictions, allowing financially constrained but productive firms to implement their projects. The estimated effect explains 7.8% and 5.8% of the variation in capital and labor within-sector dispersions respectively and it is consistent with respect to a wide range of robustness checks. It is larger when evaluating exclusively the manufacturing industry or countries with relatively small domestic credit markets, while tends to disappear for financially developed economies.

Area: Young Economists Session (YES award)

Keywords: Misallocation, Productivity, Europe, Credit Cycle

Paper file

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