slower in finance. They also estimate that had financial sector employment been constant in Ireland and Spain, during the five years, beginning in 2005, the decline in Ireland’s GDP would have been 1.4pp lower and in Spain, 0.6pp lower during the crisis.

The reasons that researchers have given for the negative correlation between too fast financial sector growth and productivity growth are instructive. Cecchetti and Kharroubi (2015) examine two reasons: the disproportionate benefit given to low productivity/high collateral sectors by banks and the possible misallocation of resources such as skilled labor. They contend that high productivity sectors tend to be more innovative (and more risky sectors); thus, projects in these sectors tend to have higher collateral risk. When funding costs are low, entrepreneurs have an incentive to invest in projects with higher pledgeability but lower productivity (expected net returns can be maintained at lower interest rates by taking on lower return but lower risk projects), reducing their demand for skilled labor. Entrepreneurs that hire skilled labor tend to invest more in low pledgeability and high return projects (often with more R&D). Recent research by Benigno et al (2015) finds that the shares of employment in both investment and manufacturing drop during periods of large capital inflows and credit growth. This is true of the GIPS experience. In their sample of countries, they find that though investment reallocation across sectors is a general phenomenon that occurs over time, the reallocation of labor occurs especially swiftly during episodes that begin when international liquidity, proxied by low US interest rates, is high. Spain is cited as a typical economy that demonstrates this phenomenon. They also find that the stronger the shift of labor out of manufacturing during the capital inflow period, the sharper the contraction after the crisis. ECB (2014c) found that when governments collected foreign assets and tried to limit cross border inflows productive resources allocated to manufacturing fell less. Policies to limit credit growth have been discussed in the wake of the 2009 crisis. In fact, output composition changed in all four countries (as did consumption) and services grew. Moreover, financial deepening has differential growth effects across countries, depending on income per capita, the quality of bank supervision and openness to trade (Barajas et al, 2013; Beck et al, 2014).<sup>74</sup> It may also matter who borrows at the country level. Another branch of research (Angeles, 2015) finds that credit expansion to households is not associated with growth and contends that fast credit growth to the household sector is more likely to beget financial crises. Credit expansion to households tends to encourage borrowing financed consumption or investment in real estate; at the same time, savings may decline as liquidity constraints fall. Islam (2016) finds that manufacturing sector growth is adversely affected by increases in the relative importance of household credit and that financial sectors contribute to consumption and GDP smoothing up to a point. When they are too large, they are associated with increased consumption and GDP per capita volatility. IMF (2006) also warns against the current account impacts of household credit expansion and the risks associated with household debt during downturns. IMF (2011) establishes links between asset market booms and busts and household mortgage credit growth with the two reinforcing each other. The accumulation of household debt should have served as a warning light (IMF, 2015b). Rising credit to households has been more likely to lead to lower savings and greater financial vulnerability particularly when households are not particularly well equipped. A number of countries provide various incentives for household borrowing, particularly mortgages (IMF 2011). These additional insights into the impact of financial booms on employment, productivity growth and longer term welfare give food for thought in terms of future policy directions.

For all countries except Ireland, the _increase_ in household credit was larger than the increase in credit to nonfinancial corporations. In the case of Greece, the difference is striking, as credit to households

> 74 Arcand et al (2012). Phillipon and Reshef (2012, 2013) discuss the large earnings premium in finance‐ an explanation for the labor reallocation to finance.

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