DP6885 Finance and Growth: When Does Credit Really Matter?

Author(s): Fabrizio Coricelli, Isabelle Roland
Publication Date: June 2008
Keyword(s): credit and output, Emerging Economies, sharp recessions
JEL(s): E44, O43
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6885

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.