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International financial flows and misallocation

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  • Federico Cingano
  • Fadi Hassan

Abstract

We study the impact of international financial flows on credit allocation exploiting the early 2000s boom of capital inflows in Italy. Using detailed bank-firm matched data we compare the patterns of credit allocation of banks with different exposure to the shock. Exposed banks significantly expand lending to high productivity and low credit-constraint firms. Constrained but high productivity firms also benefit from the shock. These results hold using alternative measures of firm productivity and credit constraints or of bank exposure to the flows, and do not seem to be driven by concurrent changes in bank funding or by the sorting of borrowers and lenders. We also find that the patterns of credit allocation induced by capital inflows have a positive, albeit small, impact on aggregate TFP. These results show that international financial flows did not contribute to increase misallocation.

Suggested Citation

  • Federico Cingano & Fadi Hassan, 2020. "International financial flows and misallocation," CEP Discussion Papers dp1697, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp1697
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    2. Varela, Liliana & Saffie, Felipe & Yi, Kei-Mu, 2020. "The Micro and Macro Dynamics of Capital Flows," CEPR Discussion Papers 14893, C.E.P.R. Discussion Papers.
    3. Daniel Carvalho & Etienne Lepers & Rogelio Jr Mercado, 2021. "Taming the "Capital Flows-Credit Nexus": A Sectoral Approach," Trinity Economics Papers tep0921, Trinity College Dublin, Department of Economics.

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    More about this item

    Keywords

    International financial flows; misallocation; productivity;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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