Why Does Credit Growth Crowd Out Real Economic Growth?

Stephen Cecchetti and Enisse Kharroubi

No 25079, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the negative relationship between the rate of growth in credit and the rate of growth in output per worker. Using a panel of 20 countries over 25 years, we establish that there is a robust correlation: the higher the growth rate of credit, the lower the growth rate of output per worker. We then proceed to build a model in which this relationship arises from the fact that investment projects that are more risky have a higher return. As their borrowing grows more quickly over time, entrepreneurs turn to safer, hence lower return projects, thereby reducing aggregate productivity growth. We take this theoretical prediction to industry-level data and find that credit growth disproportionately harms output per worker growth in industries that have either less tangible assets or are more R&D intensive.

JEL-codes: D92 E22 E44 O4 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-ent, nep-fdg and nep-mac
Note: ME
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Citations: View citations in EconPapers (5)

Published as Stephen G. Cecchetti & Enisse Kharroubi, 2019. "Why Does Credit Growth Crowd Out Real Economic Growth?," The Manchester School, vol 87(S1), pages 1-28.

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Journal Article: Why Does Credit Growth Crowd Out Real Economic Growth? (2019)
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