Why Does Structural Change Accelerate in Recessions? The Credit Reallocation Channel

The decline of the U.S. manufacturing share since 1960 has occurred disproportionately during recessions. Using evidence from two natural experiments—the collapse of Lehman Brothers in 2008 and U.S. interstate banking deregulation in the 1980s—I document a role for credit reallocation in explaining this phenomenon. Specifically, I show that losing access to credit disproportionately hurt manufacturing firms, and that the creation of new credit disproportionately benefited nonmanufacturing firms. These results arise endogenously from a model with technology-driven structural change and fixed costs of establishing new financial relationships. The model suggests an important role for long-run industry trajectories in properly accounting for the costs and benefits of policy interventions in credit markets.