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Lazy Banks? Government Borrowing and Private Credit in Developing Countries

Author

Listed:
  • M. Shahe Emran

    () (Department of Economics/Institute for International Economic Policy, George Washington University)

  • Subika Farazi

    () (George Washington University, World Bank)

Abstract

When government borrows one dollar from domestic banking sector, how much does it reduce private credit in developing countries? There is surprisingly no reliable estimate in the literature on this. We provide robust estimates of the causal effect of government borrowing on private credit using panel data on 60 developing countries and instruments based on the structure of the political system. The point estimates indicate that a $1.00 more borrowing by governmentreduces private credit by about $1.40. We also estimate bounds on the crowding out effect under the assumption that the instruments are plausibly exogeneous. The evidence is consistent with a lazy bank model of bank behavior in developing countries.

Suggested Citation

  • M. Shahe Emran & Subika Farazi, 2009. "Lazy Banks? Government Borrowing and Private Credit in Developing Countries," Working Papers 2009-09, The George Washington University, Institute for International Economic Policy.
  • Handle: RePEc:gwi:wpaper:2009-09
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    Cited by:

    1. Amjad Ali & Farooq Ahmed & Fazal- Ur- Rahman, 2016. "Impact of Government Borrowing on Financial Development (A case study of Pakistan)," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 5(3), pages 135-143, September.
    2. repec:ris:badest:0575 is not listed on IDEAS
    3. Janda, Karel & Kravtsov, Oleg, 2017. "Time-varying Effects of Public Debt on the Financial and Banking Development in the Central and Eastern Europe," MPRA Paper 77325, University Library of Munich, Germany.
    4. Paul E. Carrillo & M. Shahe Emran & Gabriela Aparicio, 2011. "Taxes, Prisons, and CFOs: The Effects of Increased Punishment on Corporate Tax Compliance in Ecuador," Working Papers 2011-02, The George Washington University, Institute for International Economic Policy.
    5. Ismihan, Mustafa & Ozkan, F. Gulcin, 2012. "Public debt and financial development: A theoretical exploration," Economics Letters, Elsevier, vol. 115(3), pages 348-351.
    6. International Monetary Fund, 2016. "El Salvador; Selected Issues," IMF Staff Country Reports 16/209, International Monetary Fund.
    7. Gordon Roger H., 2010. "Public Finance and Economic Development: Reflections based on Experience in China," Journal of Globalization and Development, De Gruyter, vol. 1(1), pages 1-29, January.

    More about this item

    Keywords

    Government Borrowing; Private Credit; Domestic Banking Sector; Crowding Out; Private Investment; Lazy Banks;

    JEL classification:

    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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