The Global Credit Project is the result of a research agenda exploring the link between credit markets and the macroeconomy around the globe. The key finding from our research is that the allocation of credit, or where in the economy credit flows, is important for understanding whether credit expansions are associated with deep economic crises or not.
Below, we present the first paper of this research agenda, which has been conditionally accepted for publication at the Review of Economic Studies. The paper also includes an extensive data appendix describing how we constructed the data we make publicly available on this website.
We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 117 countries since 1940. We document that, during credit booms, credit flows disproportionately to the non-tradable sector. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises. In contrast, credit expansions to the tradable sector are associated with sustained output and productivity growth without a higher risk of a financial crisis. To understand these patterns, we show that firms in the non-tradable sector tend to be smaller, more reliant on loans secured by real estate, and more likely to default during crises. Our findings are consistent with models in which credit booms to the non-tradable sector are driven by easy financing conditions and amplified by collateral feedbacks, contributing to increased financial fragility and a boom-bust cycle.