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Finance and Growth: When Does Credit Really Matter?


  • Coricelli, Fabrizio
  • Roland, Isabelle


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.

Suggested Citation

  • Coricelli, Fabrizio & Roland, Isabelle, 2008. "Finance and Growth: When Does Credit Really Matter?," CEPR Discussion Papers 6885, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6885

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    References listed on IDEAS

    1. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth,in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
    2. 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.
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    Cited by:

    1. 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.
    2. Roman Horváth & Jakub Matějů, 2011. "How Are Inflation Targets Set?," International Finance, Wiley Blackwell, vol. 14(2), pages 265-300, June.
    3. 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.

    More about this item


    credit and output; Emerging Economies; sharp recessions;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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