Banks Credit and Productivity Growth

30 Pages Posted: 3 Feb 2017

See all articles by Fadi Hassan

Fadi Hassan

Trinity College (Dublin)

Filippo di Mauro

European Central Bank (ECB)

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Date Written: February 1, 2017

Abstract

Financial institutions are key to allocate capital to its most productive uses. In order to examine the relationship between productivity and bank credit in the context of different financial market set-ups, we introduce a model of overlapping generations of entrepreneurs under complete and incomplete credit markets. Then, we exploit firm-level data for France, Germany and Italy to explore the relation between bank credit and productivity following the main derivations of the model. We estimate an extended set of elasticities of bank credit with respect to a series of productivity measures of firms. We focus not only on the elasticity between bank credit and productivity during the same year, but also on the elasticity between credit and future realised productivity. Our estimates show a clear Eurozone core-periphery divide, the elasticities between credit and productivity estimated in France and Germany are consistent with complete markets, whereas in Italy they are consistent with incomplete markets. The implication is that in Italy firms turn to be constrained in their long-term investments and bank credit is allocated less efficiently than in France and Germany. Hence capital misallocation by banks can be a key driver of the long-standing slow productivity growth that characterises Italy and other periphery countries.

Keywords: bank credit, capital allocation, productivity, credit constraints

JEL Classification: G10, G21, G31, D92, O16

Suggested Citation

Hassan, Fadi and di Mauro, Filippo and Ottaviano, Gianmarco I.P., Banks Credit and Productivity Growth (February 1, 2017). ECB Working Paper No. 2008, Available at SSRN: https://ssrn.com/abstract=2910943 or http://dx.doi.org/10.2139/ssrn.2910943

Fadi Hassan (Contact Author)

Trinity College (Dublin) ( email )

2-3 College Green
Dublin, Leinster D2
Ireland

Filippo Di Mauro

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation ( email )

Via Gobbi 5
Milan, 20136
Italy

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