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Why Does Credit Growth Crowd Out Real Economic Growth?
Author(s) -
Cecchetti Stephen G.,
Kharroubi Enisse
Publication year - 2019
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12295
Subject(s) - safer , economics , investment (military) , productivity , growth rate , monetary economics , labour economics , macroeconomics , geometry , computer security , mathematics , politics , computer science , political science , law
We examine the negative relationship between the rate of growth in credit and the rate of growth in output per worker. Using a panel of 20 countries over 25 years, we establish that there is a robust correlation: the higher the growth rate of credit, the lower the growth rate of output per worker. We then proceed to build a model in which this relationship arises from the fact that investment projects that are more risky have a higher return. As their borrowing grows more quickly over time, entrepreneurs turn to safer; hence, lower return projects, thereby reducing aggregate productivity growth. We take this theoretical prediction to industry‐level data and find that credit growth disproportionately harms output per worker growth in industries that have either less tangible assets or are more R&D intensive.