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Lending cycles and real outcomes: Costs of political misalignment

Çağatay Bircan and Orkun Saka

No 1/2019, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

Abstract: We use data on the universe of credit in Turkey to document a strong political lending cycle. State-owned banks systematically adjust their lending around local elections compared with private banks in the same province. There is considerable tactical redistribution: state-owned banks increase credit in politically competitive provinces which have an incumbent mayor aligned with the ruling party, but reduce it in similar provinces with an incumbent mayor from the opposition parties. This effect only exists in corporate lending as opposed to consumer loans, suggesting that tactical redistribution targets job creation to increase electoral success. Political lending influences real outcomes as credit-constrained opposition areas suffer drops in employment and firm sales. There is substantial misallocation of financial resources as credit constraints most affect provinces and industries with high initial efficiency.

JEL-codes: G21 D72 D73 P16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ara, nep-cwa and nep-pol
Date: 2019-01-21
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