Credit expansion and the economy

Luis Angeles

Applied Economics Letters, 2015, vol. 22, issue 13, 1064-1072

Abstract: Credit expansion has been associated with faster economic growth and with a higher occurrence of financial 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 firms and credit to households. The empirical analysis shows that credit to firms is responsible for the positive growth effect, 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.

Date: 2015
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DOI: 10.1080/13504851.2014.1000515

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