Report

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

Abstract: 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.

JEL Classification: E3; E32; E44; E51;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Community Development Publications and Reports

Publication Date: 2017-10

Pages: 59 pages

Note: The St. Louis Fed Center for Household Financial Stability and the Private Debt Project hosted three "Tipping Points" Household Debt Research Symposia, 2016-2018. All three sessions were centered on the question of "tipping points" in regard to debt: How and when does household debt move from being wealth-building and productive for households and the economy to being wealth-depleting and destructive for both?

Note: Conference Materials: https://fraser.stlouisfed.org/title/tipping-points-ii-mapping-understanding-impact-debt-economic-growth-9373/session-list-685749

Note: Conference Executive Summary: https://fraser.stlouisfed.org/title/tipping-points-ii-mapping-understanding-impact-debt-economic-growth-9373/executive-summary-685748

Note: Tipping Points Conference Series: https://fraser.stlouisfed.org/series/tipping-points-conference-series-9375

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• https://doi.org/10.3386/w23802