Banks Credit and Productivity Growth in the EU

The Economics Department of the European Investment Bank provides economic analysis and studies to support EIB operations and to help define its positioning, strategy and policy. The Economics Department is a team of 25 economists and staff, under the responsibility of the Director Debora Revoltella.

EIB Working papers allow guest authors to explore particular topics in depth, often relating to the annual EIB Economics Conference publication.

Financial institutions are key to allocate capital to its most productive uses.

In order to examine the relationship between bank credit and firm-level productivity in the context of different financial markets set-ups, we introduce a model of overlapping generations of entrepreneurs under complete and incomplete credit markets. Then, we exploit firm-level data for a group of European countries to explore the relation between bank credit and productivity following the main predictions of the model. We estimate an extended set of elasticities of bank credit with respect to a series of productivity measures of firms. We focus not only on the elasticity between bank credit and productivity during the same year, but also on the elasticity between credit and future realised productivity. Our estimates show a clear Euro-zone core-periphery divide, for instance the elasticities between credit and productivity estimated in France and Germany are consistent with complete markets, whereas in Italy they are consistent with incomplete markets.

The implication is that in countries that are consistent with an incomplete market setting, firms turn to be constrained in their long-term investments and bank credit is allocated less efficiently than in other countries. Hence capital misallocation by banks can be a key driver of the long-standing slow productivity growth that characterises periphery countries.

EIB: Publications: Economic Research: Working Papers http://www.eib.org/infocentre/publications/all/economic-research/working-papers.htm

EIB: Publications: Economic Research http://www.eib.org/infocentre/publications/all/economic-research/index.htm

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