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CompNet releases ECB Working Paper on productivity & bank credit

A recently published ECB Working Paper entitled Banks’ credit & productivity growth analyses the relationship between productivity and bank credit in varying contexts. The report was published by authors from CompNet (Competitiveness Research Network), which is composed of economists from the European System of Central Banks (ESCB), multiple international organisations (e.g. World Bank, OECD), universities, and think-tanks, as well as numerous non-European Central Banks.

Financial institutions play a critical role in allocating capital toward its most productive uses. In order to assess productivity and bank credit, researchers analysed the relationship in the context of different financial market set-ups by introducing a model of overlapping generations of entrepreneurs throughout complete and incomplete credit markets.

Following an initial analysis of the different financial market set-ups, the report exploits company-level data for Germany, France, and Italy by applying the main derivations of the aforementioned model to gain further insight into the bank credit-productivity relationship. Researchers estimated an extended set of elasticities of bank credit with respect to a series of productivity measures of firms. Throughout the research, the focus is not just on the elasticity between bank credit and productivity in each year, but also on the elasticity of credit and future realised productivity.

Estimates provided in the paper demonstrate a clear Eurozone core-periphery divide. Elasticities in Germany and France are consistent with complete markets, whereas those in Italy are more consistent with incomplete markets. This implies that firms in Italy tend to be constrained in long-term investments. Likewise, bank credit is allocated less efficiently than in France and Germany.

The report concludes that capital misallocation by banks has the potential to be a major driver of the long-standing slow productivity growth that tends to characterise Italy and other so-called periphery countries.

To read or download the complete ECB Working Paper, click here.

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