The effects of household and firm credit on growth: New evidence from a panel of developed and developing countries

Abstract

We use two panel data techniques in a novel large dataset to assess the dynamic interactions of household and enterprise credit with growth in developed and developing countries. Panel vector autoregressive (VAR) results reject the hypothesis that finance only follows economic growth. Instead, both panel techniques provide strong evidence that higher allocations of household credit are an impediment to economic growth regardless of a country's level of development. Otherwise, empirical results confirm that firm credit expansions are conducive to economic growth; however, this effect is not immediate in developing countries but it appears with a 1-year delay. Our results provide evidence that the credit-growth nexus changes over time and during the development process. These findings may explain the ambiguous and vanishing effect of finance on growth in recent literature. 2020 John Wiley & Sons Australia, Ltd