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Correlated lending to government and the private sector: what do we learn from the Great Recession?

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  • Peterson K. Ozili

Abstract

Purpose - The purpose of the study is to investigate the correlation between credit supply to government and credit supply to the private sector to determine whether there is a crowding-out or crowding-in effect of credit supply to government on credit supply to the private sector. Design/methodology/approach - The study used data from 43 countries during the 1980–2019 period. The study employed the Pearson correlation methodology to analyze the data. Findings - There is a significant positive correlation between credit supply to government and credit supply to the private sector. There is also a significant positive relationship between credit supply to government and credit supply to the private sector, implying a crowding-in effect of government borrowing on private sector borrowing. The positive correlation between credit supply to government and credit supply to the private sector by banks is stronger and highly significant in the period before the Great Recession, while the positive correlation is weaker and less significant during the Great Recession, and the correlation further weakens after the Great Recession. The regional analyses show that the positive correlation between credit supply to government and credit supply to the private sector by banks is stronger and highly significant in the African region than in the Asian region and the region of the Americas. Originality/value - There is no evidence on the correlation between credit supply to government and credit supply to the private sector during the Great Recession.

Suggested Citation

  • Peterson K. Ozili, 2023. "Correlated lending to government and the private sector: what do we learn from the Great Recession?," Arab Gulf Journal of Scientific Research, Emerald Group Publishing Limited, vol. 42(1), pages 114-133, February.
    • Handle: RePEc:eme:agjsrp:agjsr-09-2022-0176
    DOI: 10.1108/AGJSR-09-2022-0176
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    References listed on IDEAS

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    1. Yi Huang & Marco Pagano & Ugo Panizza, 2020. "Local Crowding‐Out in China," Journal of Finance, American Finance Association, vol. 75(6), pages 2855-2898, December.
    2. Van Ha & Mark J. Holmes & Tuyen Quang Tran, 2022. "Does foreign investment crowd in domestic investment? Evidence from Vietnam," International Economics, CEPII research center, issue 171, pages 18-29.
    3. Jin, Xiao Meng & Mai, Yong & Cheung, Adrian Wai Kong, 2022. "Corporate financialization and fixed investment rate: Evidence from China," Finance Research Letters, Elsevier, vol. 48(C).
    4. Abubakar Ado Ahmad & Adegoke Ibrahim Adeleke & Augustine Ujunwa, 2019. "Government Borrowing Behaviour: Implications for Private Sector Growth in Nigeria," International Journal of Sustainable Development & World Policy, Conscientia Beam, vol. 8(2), pages 68-82.
    5. Abubakar Ado, Ahmad & Adegoke Ibrahim, Adeleke & Augustine, Ujunwa, 2019. "Government Borrowing Behaviour: Implications for Private Sector Growth in Nigeria," International Journal of Sustainable Development & World Policy, Conscientia Beam, vol. 8(2), pages 68-82.
    6. Deng, Jiapin, 2022. "The crowding-out effect of formal finance on the P2P lending market: An explanation for the failure of China's P2P lending industry," Finance Research Letters, Elsevier, vol. 45(C).
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    More about this item

    Keywords

    Domestic credit to the private sector; Government borrowing; Crowding-out; Credit supply; Private sector; Government; Bank credit; Recession; Africa; Asia; Europe; America; Correlation; E51; G21;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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