Finance and Growth: When Does Credit Really Matter?

25 Pages Posted: 20 Aug 2008

See all articles by Fabrizio Coricelli

Fabrizio Coricelli

University of Siena - Department of Political and International Sciences ; Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR)

Isabelle Roland

European Bank for Reconstruction and Development (EBRD)

Date Written: June 2008

Abstract

The paper provides a simple theory and empirical evidence on the asymmetric effect of credit markets on output decline and output growth. When credit markets are underdeveloped and enterprise activity is financed outside the banking sector, exogenous shocks may induce a break-up of both credit and production chains, leading to sudden and sharp collapses in output. The development of a banking sector can reduce the probability of such collapses. Using industry-level data across a large cross-section of countries, the empirical analysis suggests that credit markets play a more important role in softening output declines than in fostering growth or recovery. These results suggest that credit markets are one of the main suspects for explaining why the magnitude of output declines tends to be larger in emerging markets than in advanced market economies.

Keywords: credit and output, Emerging Economies, sharp recessions

JEL Classification: E44, O43

Suggested Citation

Coricelli, Fabrizio and Roland, Isabelle, Finance and Growth: When Does Credit Really Matter? (June 2008). CEPR Discussion Paper No. DP6885, Available at SSRN: https://ssrn.com/abstract=1240195

Fabrizio Coricelli (Contact Author)

University of Siena - Department of Political and International Sciences ( email )

Via Mattioli, 10
Siena, 53100
Italy

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Isabelle Roland

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

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