International Financial Flows and Misallocation  joint with Federico Cingano

Abstract:

We study the impact of international financial flows on credit allocation exploiting the early 2000s boom in capital inflows in Italy. Using detailed bank-firm matched data, we identify lenders that benefited more from the flows and estimate whether the subsequent shock to credit supply varied with firm characteristics. Exposed banks significantly expanded lending to high-productive and low-risk firms. Riskier firms also benefitted from the supply shock conditional on being highly productive. These results hold using alternative measures of firm productivity and risk or of bank exposure to the capital flows, and do not seem to be driven by concurrent changes in bank funding or by the sorting of borrowers and lenders. Our findings do not support the idea that international financial flows contributed to increase misallocation.