Credit expansion and the economy

Abstract

Credit expansion has been associated with faster economic growth and with a higher occurrence of …nancial crises, a pair of results which seem to contradict each other. This paper advances an explanation for these results by separating credit to the private sector into credit to …rms and credit to households. The empirical analysis shows that credit to …rms is responsible for the positive growth e¤ect, while the higher occurrence of crises is mainly due to credit to households. The events of the last decade, where fast credit expansion led to crises and very little growth, can be understood as a shift in the composition of credit towards its household component.JEL classi…cation: E44, G21.

Financial Development and Economic Growth: The Role of Foreign-Owned Banks in CESEE Countries

“…Banks owned by development banks are expected to grant credit to finance infrastructure and long-term projects promoted by private firms or public bodies. Recent contributions have highlighted that the banking sector plays a growth-supporting role in economic growth to the extent that it lends to enterprises and not to households [83,[85][86][87][88]. As highlighted by [83] on a sample of 34 countries, with data available on credit composition, credit to households is likely to result in lower savings and therefore in lower growth.…”

Rethinking Financial Deepening: Stability and Growth in Emerging Markets

“…The composition of credit (to firms as opposed to households) matters for growth. Following the approach of Beck and others (2009) and Angeles (2015), and based on a subsample of 30-34 countries with data available on credit composition, the analysis shows that credit to firms tends to have a greater growth impact than credit to households. Credit to firms removes financing constraints, thus leading to greater investment and growth.…”

Finance and Economic Growth in OECD and G20 Countries

“…For instance, an overextension of housing finance, which can stem from significant tax advantages (Cournède et al, 2015), may misallocate capital and thereby slow GDP growth. Furthermore, housing construction notoriously generates boom-and-bust cycles (Angeles, 2015). This paper uses household credit as a proxy for the amount of housing finance.…”