Working Paper
Credit Market Imperfections in Production Networks (Job Market Paper)
Abstract:
This paper studies how credit market imperfections shape interconnections among producers in economies with input–output linkages, and how they alter the propagation and aggregation of microeconomic shocks. I develop a dynamic, multi-sector model of production networks in which heterogeneous firms face collateral constraints to finance operations, in the spirit of Kiyotaki and Moore (1997). The model shows that when credit market imperfections restrict resource access, producers become additionally interconnected through their real credit conditions. Ex post, the sector-level profit-to-revenue ratio provides a sufficient statistic for tracking these conditions, consistent with recent evidence from Europe and the United States. Using this statistic, I establish an aggregation theorem that decomposes long-run aggregate TFP growth into micro-level sources and revises the notion of industry centrality for policy design: high profitability increases a sector’s centrality for credit-market interventions (e.g., improving access to credit) while reducing its centrality for standard industrial policies (e.g., taxes or subsidies). A quantitative application to the U.S. economy from 1997–2016 shows that financial deepening accounts for nearly 76% of aggregate TFP growth. The Housing and Chemical Products sectors emerge as the most credit-central industries, while Wholesale Trade—ranked first by traditional production centrality—falls outside the top ten, underscoring how credit-based centrality highlights very different priorities for effective policy interventions.
Working in Progress
Collateral, Credit Access, and the International Capital Allocation Puzzle