Does Local Credit Matter? The Spanish Case

Xavier Freixas and Luz Mary Pinzón

No 1512, Working Papers from Barcelona School of Economics

Abstract: This paper investigates the relationship between ï¬nancial development and economic growth, using data from Spanish provinces during a period marked by signiï¬cant ï¬nancial events: banking deregulation (1988), a credit and housing boom (2001–2007), and a severe banking crisis (2008–2012). The study pursues three key objectives. First, it examines the impact of credit— distinct from the broader ï¬nancial environment and institutional infrastructure (e.g., property rights enforcement, accounting standards)—on long-term real per capita GDP growth. Second, it analyzes whether this effect diminishes as the level of credit increases. Third, it evaluates the role of mortgage lending in shaping long-term growth. Our ï¬ndings indicate that credit exerts a positive influence on both ï¬ve- and ten-year cumulative growth rates, independent of the broader ï¬nancial environment, which is largely homogeneous across provinces.At the same time, we observe that the marginal contribution of credit to long-term growth declines as credit levels rise.Despite this diminishing marginal effect, we ï¬nd no evidence of a "too much of a good thing" effect as: higher credit-to-GDP ratios continue to exert a consistently positive impact. Finally, regarding mortgage credit, we do not ï¬nd any positive effect of this variable on long-term growth.

Keywords: financial development; economic growth; credit; banking deregulation (search for similar items in EconPapers)
JEL-codes: E44 G21 O16 (search for similar items in EconPapers)
Date: 2025-09
New Economics Papers: this item is included in nep-fdg and nep-his
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