Measuring the impact of malfunctioning credit markets on productivity

a column by Tim Besley (London School of Economics; and CEPR), Isabelle Roland (University of Cambridge, UK) and John Van Reenen (MIT) for VOX: CEPR&rsquo's Policy Portal

Since the Global Crisis, there has been a renewed awareness of how frictions in credit markets can damage economic efficiency due to a higher cost of capital and/or capital being misallocated away from its most productive uses.

This column presents a new methodological approach for calculating the cost of credit frictions which can be implemented with relatively simple data in multiple contexts. It finds that credit market frictions explain half of the fall in UK productivity in the Great Recession and depress output by 28% on average.

Figure 1 GDP per hour worked in the UK

Notes: Whole economy GDP per hour worked, seasonally adjusted. ONS Statistical bulletin, Labour Productivity Q2 2019, release date 8 October 2019 (Q2 2008=100). Predicted value after Q2 2008 is the dashed line calculated assuming a historical average growth rate of 2.2%.

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Labels:
credit_frictions, productivity, credit_markets, UK, GDP,

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