The Asymmetric Effect of Credit Supply on Firm-Level Productivity Growth

We study the impact of bank credit on firm productivity. We exploit a matched firm-bank database, covering all the credit relationships of Italian corporations, to measure idiosyncratic supply-side shocks to credit availability and estimate a production model augmented with financial frictions. We find the effect of credit supply to be asymmetric: contractions harm TFP growth, halting productivity-enhancing activities; positive credit supply shocks have limited effects. This points toward a role of financial stability in preserving productivity growth.