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Moderating effect of credit growth for financial development on economic growth: Considering banking crises and endogeneity

Author

Listed:
  • Fang, Hao
  • Chung, Chien-Ping
  • Lee, Yen-Hsien

Abstract

Using a dynamic panel threshold regression that allows both the threshold variable and regressors to be endogenous, this study precisely analyzes the moderating effects of the threshold in a credit market on the relationship between financial development and economic growth considering a banking crisis. Our sample includes data from 54 countries for1996–2017. We find that without a banking crisis, the effect of finance on growth under lower credit growth is significantly positive, but this effect turns significantly negative under higher credit growth. However, when a banking crisis occurs, the net effect of the finance–growth relationship on higher credit growth becomes increasingly negative. Our findings indicate that the effect of financial development on economic growth intuitively depends on growth in private credit rather than only the level of the credit market.

Suggested Citation

  • Fang, Hao & Chung, Chien-Ping & Lee, Yen-Hsien, 2025. "Moderating effect of credit growth for financial development on economic growth: Considering banking crises and endogeneity," The Quarterly Review of Economics and Finance, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:quaeco:v:104:y:2025:i:c:s1062976925001024
    DOI: 10.1016/j.qref.2025.102061
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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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