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How effective are directed credit policies in the United States? A literature survey

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  • Schwarz, Anita M.
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    Abstract

    Schwarz surveys U.S. experience with directed credit as background for a larger study of the Asian experience. Almost half of net credit lent in the United States annually is directly affected by government policies - half of net credit covering budget deficits, and half falling under various federal credit programs. The main difference between U.S. and Asian credit policy is that U.S. credit policy is oriented more toward equity than toward growth. Different sectors are affected differently by U.S. credit policies. Few empirical studies test how U.S. credit policy affects growth - perhaps partly because of the motives behind those policies. Few enpirical studies even test whether the policies edffectively increase credit to the target group. Schwarz outlines a method for testing the effectiveness of credit policy, then examinesexisting empirical work to see how it fits that methodology. The first common empirical technique examines credit allocation in the economy. Schwarz finds that for the largest program, housing credit, the effect of credit program on credit allocation is very small and may be negative when cross-program effects are considered. The second common empirical technique examines individual sectors. Results here are mixed. In agriculture, much of the credit raises the demand for land, providing a gain for landowners rather than increasing production. In education, less than a third of the students who got government credit would not have gone to college without it. So in both cases, the credit has a positive impact but at a sizable cost. Schwarz concludes that despite its huge volume, directed credit in the United States has a limited impact in growth. The credit programs have generally succeeded in increasing credit to the targeted group, but not necessarily in increasing investment by that group.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1019.

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    Date of creation: 30 Nov 1992
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    Handle: RePEc:wbk:wbrwps:1019

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    Related research

    Keywords: Banks&Banking Reform; Environmental Economics&Policies; Housing Finance; Financial Intermediation; Economic Theory&Research;

    References

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    1. Gale, William G, 1991. "Economic Effects of Federal Credit Programs," American Economic Review, American Economic Association, vol. 81(1), pages 133-52, March.
    2. Robert H. DeFina, 1984. "The link between savings and interest rates: a key element in the tax policy debate," Business Review, Federal Reserve Bank of Philadelphia, issue Nov/Dec, pages 15-21.
    3. Arcelus, Francisco & Meltzer, Allan H, 1973. "The Markets for Housing and Housing Services," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 78-99, Part I Fe.
    4. Hodgman, Donald R, 1972. "Selective Credit Controls," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 4(2), pages 342-59, May.
    5. Charles W. Calomiris & R. Glenn Hubbard & James H. Stock, 1987. "Growing in Debt: The 'Farm Crisis' and Public Policy," NBER Working Papers 2085, National Bureau of Economic Research, Inc.
    6. Richard G. Davis, 1971. "An Analysis of Quantitative Credit Controls and Related Devices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 2(1), pages 65-104.
    7. Penner, Rudolph G & Silber, William L, 1973. "The Interaction Between Federal Credit Programs and the Impact on the Allocation of Credit," American Economic Review, American Economic Association, vol. 63(5), pages 838-52, December.
    8. Buckley, Robert M & Gross, David J, 1985. "Selective Credit Policies and the Mortgage Market: Cross-sectional Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 358-70, August.
    9. Arcelus, Francisco & Meltzer, Allan H, 1973. "The Markets for Housing and Housing Services: Reply," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(4), pages 973-78, November.
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    Cited by:
    1. Ang, James B., 2009. "Private Investment and Financial Sector Policies in India and Malaysia," World Development, Elsevier, vol. 37(7), pages 1261-1273, July.
    2. James B. Ang, 2007. "Are Financial Sector Policies Effective In Deepening The Malaysian Financial System?," Development Research Unit Working Paper Series 02-07, Monash University, Department of Economics.
    3. Ang, James, 2009. "Financial Liberalization Or Repression?," MPRA Paper 14497, University Library of Munich, Germany.
    4. James Ang, 2008. "Private Investment And Financial Sector Policies In Developing Countries," Development Research Unit Working Paper Series 07/08, Monash University, Department of Economics.

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