DP17186 International Financial Flows and Misallocation: Evidence from Micro Data
Using detailed bank-firm matched data, we study the impact of international financial flows on misallocation. We exploit a boom of capital inflows in Italy and identify the patterns of credit allocation by banks with different exposure to such boom. We find that exposed banks tilt credit supply to high-productivity firms and that credit allocation reduces the dispersion of productivity having a positive impact on aggregate TFP growth. We explore alternative drivers of misallocation and find evidence that, in a context of raising financial deepening, the expansion of banks funded by an increase of bonds sold domestically is responsible.