Effect of abnormal credit expansion and contraction on GDP per capita in ECOWAS countries

Abstract

We investigate the impact of abnormal credit expansion and contraction on the GDP per capita of ECOWAS countries. We analyse abnormal credit from two dimensions: first, the impact of abnormal credit contraction on GDP per capita, and second, the impact of abnormal credit expansion on GDP per capita. Using data for 10 ECOWAS countries from 1993 to 2021, we find evidence that abnormal credit contraction reduces the GDP per capita of ECOWAS countries. We also find some evidence that abnormal credit expansion reduces the GDP per capita of ECOWAS countries. More specifically, a unit increase in abnormal credit contraction decreases GDP per capita by 0.99 percent while a unit increase in abnormal credit expansion decreases GDP per capita by only 0.1 percent. The findings confirm that 'too little' or 'too much' credit does not improve economic output per person in immature financial systems. We also observe that banking sector solvency and a strong legal system have a positive effect on the GDP per capita of ECOWAS countries while banking sector efficiency has a negative effect on GDP per capita.

Effect of abnormal increase in credit supply on economic growth in Nigeria

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“…The models are estimated using the GMM regression methods. The GMM regression technique we use in this paper has been used in previous studies such as Rachdi and Mbarek (2011), Ozili et al (2022a), Ibrahim and Alagidede (2018), Ozili (2021) and Ustarz and Fanta (2021). The GMM model has one lag while the instruments are the first-difference of the variables.…”

“…When these changes are predictable, it allows economic agents to plan and adjust their business activities in anticipation of changes in external financing conditions. However, when credit supply increases or decreases in an unpredictable, unexpected or abnormal manner, it creates shocks that give rise to irrational behaviour among affected economic agents, and their behaviours lead to outcomes that affect economic output and growth (Ozili et al ., 2022a, b). In this paper, we consider the case of abnormal increase in credit supply.…”

Correlated lending to government and the private sector: what do we learn from the Great Recession?

“…The effects of the Great Recession aggregate credit dynamics in various contexts such as Lane and McQuade (2014), Gozgor (2014) and Ozili, Oladipo, and Iorember (2022). The sample period is from 1980 to 2019 which is a 39-year period.…”

Correlated Lending to Government and the Private Sector: What Do We Learn from the Great Recession?

“…These four variables are macro-financial indicators of aggregate credit supply in the economy (see table 1). Several studies have used these macro indicators to measure aggregate credit dynamics in various contexts such as Lane and McQuade (2014), Gozgor (2014) and Ozili et al (2022). The sample period is from 1980 to 2019 which is a 39-year period.…”