The Differentiated Effects of Bank Credit on Economic Activity in an Market

This study investigates the differentiated effects of bank credit on economic activity in an emerging economy. Unlike the recent literature on credit differentiation, which analyzes household credit versus commercial credit, this paper focuses on credit differentiation in different economic sectors: manufacturing, construction, real estate services, retail trade, and wholesale trade. In analyzing the case of Mexico, the main conclusion is that bank credit generates differentiated effects on economic activity: only direct impacts of credit on manufacturing and retail trade were found, but indirect impacts of credit were found in all analyzed sectors. In addition to gross fixed investment, which is the traditional transmission mechanism for manufacturing firms, we show an additional transmission mechanism for service companies, which is the companies' consumption of goods and services. These results propose that bank credit can benefit the economy through multiple channels.