Credit Supply and Productivity Growth

Abstract

We study the impact of bank credit supply on firm output and productivity. Exploiting a matched firm-bank database, covering all credit relationships of Italian corporations over more than a decade, we measure idiosyncratic supply-side shocks to firm credit availability. With this, we estimate a production model augmented with financial frictions, and show that an expansion of credit supply leads firms to increase both their inputs and value added and revenues for a given level of inputs. Our estimates imply that a credit crunch will be followed by a productivity slowdown, as experienced by most OECD countries after the Great Recession. Quantitatively, the credit contraction between 2007 and 2009 can account for about a quarter of the observed decline in Italian total factor productivity growth. Results are robust to an alternative measure of credit supply shock that uses the 2007-2008 interbank market freeze as a natural experiment to control for assortative matching between borrowers and lenders. Finally, we investigate possible channels: access to credit fosters IT-adoption, innovation, exporting, and adoption of superior management practices.