Credit booms and the “productivity puzzle”

Low productivity growth has confused both policymakers and economists. In this paper, we argue that the credit cycle can help explain the so-called “productivity puzzle”.

In phases with loose credit conditions, investment of lower quality is financed. This slows aggregate productivity growth. The opposite happens when credit conditions tighten.

We show evidence for a sample of euro area countries that resources were misallocated during the recent credit boom. Activity shifted from the more productive manufacturing sector towards less productive construction and real estate sectors.

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