Why Does Credit Growth Crowd Out Real Economic Growth?

28 Pages Posted: 24 Sep 2018 Last revised: 12 Jul 2023

See all articles by Stephen G. Cecchetti

Stephen G. Cecchetti

National Bureau of Economic Research (NBER); Brandeis International Business School; Centre for Economic Policy Research (CEPR); European Systemic Risk Board

Enisse Kharroubi

Bank for International Settlements (BIS)

Date Written: September 2018

Abstract

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.

Suggested Citation

Cecchetti, Stephen G. and Cecchetti, Stephen G. and Kharroubi, Enisse, Why Does Credit Growth Crowd Out Real Economic Growth? (September 2018). NBER Working Paper No. w25079, Available at SSRN: https://ssrn.com/abstract=3254073

Stephen G. Cecchetti (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Brandeis International Business School ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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European Systemic Risk Board ( email )

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Enisse Kharroubi

Bank for International Settlements (BIS) ( email )

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Switzerland

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