Credit Supply and Productivity Growth

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. We use this to 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 2007-2009 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 the possible channels: access to credit fosters IT-adoption, innovation, exporting, and the adoption of superior management practices. ∗Bank of Italy [email protected] §Stanford University [email protected] We thank Nick Bloom, Tim Bresnahan, Liran Einav, and Matt Gentzkow for invaluable advises. We thank, for their insightful comments, Barbara Biasi, Matteo Bugamelli, Francesca Carta, Emanuele Colonnelli, Han Hong, Pete Klenow, Ben Klopack, Simone Lenzu, Matteo Leombroni, Andrea Linarello, Francesca Lotti, Davide Malacrino, Petra Persson, Luigi Pistaferri, Paolo Sestito, Joshua Rauh, Luca Riva, Cian Ruane, Enrico Sette, Pietro Tebaldi and all partecipants to Stanford IO workshop, Stanford applied economics seminar (Fall 2015, Winter 2017 and Fall 2017), Second Bay Area Labor and Public conference (Fall 2015), seminars at Bank of Italy (Fall 2015 and Summer 2017), the Brown Bag Seminars at the Italian Treasury Department (Spring 2017), and the 13th CompNet Annual Conference (Summer 2017). Francesco Manaresi developed part of this project while visiting the Bank for International Settlement under the Central Bank Research Fellowship program. Nicola Pierri gratefully acknowledges financial support from the Bank of Italy through the Bonaldo Stringher scholarship, from The Europe Center at Stanford University through the Graduate Student Grant Competition and from the Gale and Steve Kohlhagen Fellowship in Economics through a grant to the Stanford Institute for Economic Policy Research; all errors remain our sole responsibility. The views expressed by the authors do not necessarily reflect those of the Bank of Italy.