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Finance and Growth: When Does Credit Really Matter?

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  • Coricelli, Fabrizio
  • Roland, Isabelle

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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6885.

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Date of creation: Jun 2008
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Handle: RePEc:cpr:ceprdp:6885

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Related research

Keywords: credit and output; Emerging Economies; sharp recessions;

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References

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  1. Guillermo A. Calvo & Fabrizio Coricelli, 1993. "Output Collapse in Eastern Europe: The Role of Credit," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 32-52, March.
  2. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
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Cited by:
  1. Roman Horváth & Jakub Matějů, 2011. "How Are Inflation Targets Set?," International Finance, Wiley Blackwell, vol. 14(2), pages 265-300, 06.
  2. Amidu, Mohammed, 2013. "The effects of the structure of banking market and funding strategy on risk and return," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 143-155.
  3. Roman Horváth, 2009. "The Determinants of the Interest Rate Margins of Czech Banks," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(2), pages 128-136, June.

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