Does local credit matter? The Spanish case

This paper investigates the relationship between ï¬ nancial development and economic growth, using data from Spanish provinces during a period marked by signiï¬ cant ï¬ nancial events: banking deregulation (1988), a credit and housing boom (2001–2007), and a severe banking crisis (2008–2012). The study pursues three key objectives. First, it examines the impact of credit— distinct from the broader ï¬ nancial environment and institutional infrastructure (e.g., property rights enforcement, accounting standards)—on long-term real per capita GDP growth. Second, it analyzes whether this effect diminishes as the level of credit increases. Third, it evaluates the role of mortgage lending in shaping long-term growth. Our ï¬ ndings indicate that credit exerts a positive influence on both ï¬ ve- and ten-year cumulative growth rates, independent of the broader ï¬ nancial environment, which is largely homogeneous across provinces.At the same time, we observe that the marginal contribution of credit to long-term growth declines as credit levels rise.Despite this diminishing marginal effect, we ï¬ nd no evidence of a “too much of a good thing†effect as: higher credit-to-GDP ratios continue to exert a consistently positive impact. Finally, regarding mortgage credit, we do not ï¬ nd any positive effect of this variable on long-term growth.