How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels

by Atif Mian, Amir Sufi, and Emil Verner

Working Paper, August 2018

How do credit supply expansions affect the real economy? In this paper, Mian, Sufi, and Verner design and implement a test that helps to distinguish between two key channels: increases in productive capacity and household demand. Using the 1980s banking deregulation as a quasi-experiment and an international panel of 56 countries, they find that credit supply boosts household debt, non-tradable sector employment, and the price of non-tradable goods, with limited effects on tradable sector employment. These findings suggest that household demand is the main channel, and that credit expansions can amplify the business cycle, leading to more severe recessions.

Bank-Branch Supply, Financial Inclusion
and Wealth Accumulation

by Claire Célérier and Adrien Matray

Revise & Resubmit, Review of Financial Studies

Does financial inclusion enable wealth accumulation? In this paper, Matray and Célérier use the interstate branching deregulation in the US to show that an expansion of local bank branches has important effects on low-income households. They find that deregulation increases the likelihood that households hold a bank account, which in turn enables them to accumulate wealth, invest in durable assets such as cars, and access credit markets. This also decreases households' likelihood to face financial strains.

Political Connections and Resource Allocation in Private Markets: A Social Network Channel

by Terry Moon and David Schoenherr

Working Paper, September 2018

In this paper, David Schoenherr and Terry Moon (PhD candidate at Princeton) show that social networks can play an important role in resource allocation. They study the election of Lee Myung Bak as President of Korea in December 2007, who appointed a considerable number of people from his social networks to important government posts. Private banks, in turn, also appointed executives from the new president's networks. The connected banks extended credit at considerably more favorable terms to borrowers with connected CEOs, but not to those without connections. Despite the preferential treatment, connected borrowers were more likely to default on their debt. This shows how social networks can take hold of the allocation of a substantial amount of resources through bank lending.

Transmission of Monetary Policy to Consumption and Population Aging

by Arlene Wong

Revise and Resubmit, American Economic Review

It is well-known that the population of most industrialized countries is aging. This paper assesses the effects of demographic changes on the transmission of monetary policy to consumption. Arlene Wong shows that the consumption of young people (particularly that of young home owners) reacts more to monetary policy shocks than that of older people. She then develops a life-cycle model with fixed rate mortgages that explains these facts and shows that the mortgage channel accounts for a sizable share of the young-old difference in consumption responses. This implies that population aging might significantly dampen the transmission of monetary policy to aggregate consumption.

Industrial Policies in Production Networks

by Ernest Liu

Working Paper, September 2018

Why do many developing countries adopt industrial policies that favor particular sectors? Can such interventions have positive effects? Ernest Liu attempts to answer this question by characterizing industrial policy in production networks. Market imperfections compound through backward demand linkages, causing upstream sectors to be the sink of imperfections and have the largest size distortions. His key finding is that the distortion in sectoral size is a sufficient statistic for the social value of promoting that sector; thus, there is an incentive for a well-meaning government to subsidize upstream sectors. Furthermore, aggregate effects of sectoral interventions can be simply summarized by the cross-sector covariance between this sufficient statistic and policy spending. He finds a high correlation between the distortion in sectoral size and sectoral policies in South Korea in the 1970s and modern-day China, suggesting that sectoral interventions might have generated positive aggregate effects in these economies.

Busy Bankruptcy Courts and the Cost of Credit

by Karsten Müller

Working Paper, May 2018

How large are the social costs of short-staffed courts? In this paper, Karsten Müller studies this question in the context of bankruptcy courts in the United States. Following the 2005 bankruptcy reform "BAPCPA", the caseload of judges in court districts with many consumer bankruptcies dropped sharply. However, the law left the legal framework for business bankruptcies largely unaffected. He shows that interest rate spreads dropped and maturities increased for borrowing corporations headquartered in bankruptcy districts with the highest drop in judge caseload, particularly for firms that are more likely to go bankrupt. A back-of-the-envelope calculation suggests that the US-wide costs of inefficient bankruptcy courts are large, on the order of $670 million a year.

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