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Studying the Effects of Household and Firm Credit on the Trade Balance: The Allocation of Funds Matters


  • Berrak Buyukkarabacak
  • Stefan Krause


One of the most widely used indicators of financial development in the empirical literature is the Private Credit to GDP ratio. A key shortcoming of this measure is that it does not distinguish between the share of credit extended to households vis-a-vis firms. It is our contention that this distinction is crucial to analyze the effects of financial development on the trade balance: Changes in the composition of private credit should have an impact on the foreign trade deficit. Our empirical findings show that: 1) Private credit to households is negatively and significantly correlated with net exports; 2) Private credit to firms is not significantly correlated with net exports; and 3) The allocation of credit matters; a higher proportion of firm credit is positively and significantly correlated with net exports. A key implication of these results is that, whenever there is a sizeable trade deficit or a high risk of a currency crisis, policy makers should limit the growth of household credit while, at the same time, encourage further allocation of funds to firms.

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  • Berrak Buyukkarabacak & Stefan Krause, 2005. "Studying the Effects of Household and Firm Credit on the Trade Balance: The Allocation of Funds Matters," Emory Economics 0510, Department of Economics, Emory University (Atlanta).
  • Handle: RePEc:emo:wp2003:0510

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    Cited by:

    1. Bezemer, Dirk & Samarina, Anna, 2016. "Debt Shift, Financial Development and Income Inequality in Europe," Research Report 16020-GEM, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

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