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Microeconomic implications of credit booms: evidence from emerging Europe

Author

Listed:
  • Fabrizio Coricelli

    (Université Paris 1, Panthéon-Sorbonne)

  • Nigel Driffield

    (Aston Business School)

  • Sarmistha Pal

    (Brunel University)

  • Isabelle Roland

    (London School of Economics)

Abstract

While credit is essential for investment, innovation and economic growth, there are risks related to excessive indebtedness in the corporate sector in the form of increased likelihood of financial distress and bankruptcy. The recent global crisis has highlighted the macroeconomic risks of credit booms. This paper focuses on microeconomic implications of high leverage and provides an innovative firm-level approach to endogenously identify the threshold leverage beyond which corporate indebtedness becomes “excessive”. Estimates for emerging central and eastern European countries suggest that total factor productivity (TFP) growth increases with leverage until it reaches a critical threshold. Beyond this threshold, higher leverage lowers TFP growth.

Suggested Citation

  • Fabrizio Coricelli & Nigel Driffield & Sarmistha Pal & Isabelle Roland, 2010. "Microeconomic implications of credit booms: evidence from emerging Europe," Working Papers 119, European Bank for Reconstruction and Development, Office of the Chief Economist.
    • Handle: RePEc:ebd:wpaper:119
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    More about this item

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies
    • P5 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems

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