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Lazy Banks? Government Borrowing and Private Credit in Developing Countries

Author

Listed:
  • M. Shahe Emran

    (Department of Economics/Institute for International Economic Policy, George Washington University)

  • Subika Farazi

    (George Washington University, World Bank)

Abstract

When government borrows one dollar from domestic banking sector, how much does it reduce private credit in developing countries? There is surprisingly no reliable estimate in the literature on this. We provide robust estimates of the causal effect of government borrowing on private credit using panel data on 60 developing countries and instruments based on the structure of the political system. The point estimates indicate that a $1.00 more borrowing by governmentreduces private credit by about $1.40. We also estimate bounds on the crowding out effect under the assumption that the instruments are plausibly exogeneous. The evidence is consistent with a lazy bank model of bank behavior in developing countries.

Suggested Citation

  • M. Shahe Emran & Subika Farazi, 2009. "Lazy Banks? Government Borrowing and Private Credit in Developing Countries," Working Papers 2009-09, The George Washington University, Institute for International Economic Policy.
    • Handle: RePEc:gwi:wpaper:2009-09
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    References listed on IDEAS

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    1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    2. Aureo de Paula & Jose A. Scheinkman, 2006. "The Informal Sector," Levine's Bibliography 122247000000001030, UCLA Department of Economics.
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    Cited by:

    1. Zakariae Belmkaddem, 2019. "The different forms of crowding-out effects in Morocco: an empirical study (1980-2018) [Les différentes formes des effets d’éviction au Maroc : une étude empirique (1980-2018)]," Post-Print hal-02867583, HAL.
    2. repec:arp:tjssrr:2019:p:1144-1150 is not listed on IDEAS
    3. Lidiema, Caspah, 2017. "Effects of government borrowing on private investments in Kenya," KBA Centre for Research on Financial Markets and Policy Working Paper Series 22, Kenya Bankers Association (KBA).
    4. Janda, Karel & Kravtsov, Oleg, 2017. "Time-varying Effects of Public Debt on the Financial and Banking Development in the Central and Eastern Europe," MPRA Paper 77325, University Library of Munich, Germany.
    5. Paul E. Carrillo & M. Shahe Emran & Gabriela Aparicio, 2011. "Taxes, Prisons, and CFOs: The Effects of Increased Punishment on Corporate Tax Compliance in Ecuador," Working Papers 2011-02, The George Washington University, Institute for International Economic Policy.
    6. Walid Benayed & Foued Badr Gabsi, 2020. "Domestic public debt and financial development in Sub-Saharan Africa: Is there an inverted-U relationship?," Economics Bulletin, AccessEcon, vol. 40(1), pages 846-854.
    7. Ismihan, Mustafa & Ozkan, F. Gulcin, 2012. "Public debt and financial development: A theoretical exploration," Economics Letters, Elsevier, vol. 115(3), pages 348-351.
    8. Amjad Ali & Farooq Ahmed & Fazal- Ur- Rahman, 2016. "Impact of Government Borrowing on Financial Development (A case study of Pakistan)," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 5(3), pages 135-143, September.
    9. Gordon Roger H., 2010. "Public Finance and Economic Development: Reflections based on Experience in China," Journal of Globalization and Development, De Gruyter, vol. 1(1), pages 1-29, January.
    10. Makambi, Steve & Muhindi, Reuben & Nduku, Gillian, 2017. "Influence of bank lending to the government on private sector credit in Kenya: A fiscal deficit specification," KBA Centre for Research on Financial Markets and Policy Working Paper Series 18, Kenya Bankers Association (KBA).
    11. Abiola John Asaleye* & Adenike Omowumi Oladipo & Barnabas Olusegun Obasaju, 2018. "Domestic Debt Sustainability and Private Sector in Nigeria: Implications on Employment," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 842-848:5.
    12. Iqbal , Kazi & Islam, Mir Ariful, 2014. "Commercial Banks' Investment in Capital Market and Its Impact on Private Sector Credit," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 37(3), pages 51-77, September.
    13. Ahmad A. Al-Majali, 2018. "Crowding Out Effect of Public Borrowing: The Case of Jordan," International Review of Management and Marketing, Econjournals, vol. 8(1), pages 119-125.
    14. Romain Bouis, 2019. "Banks’ Holdings of Government Securities and Credit to the Private Sector in Emerging Market and Developing Economies," IMF Working Papers 2019/224, International Monetary Fund.
    15. Saganga Mussa Kapaya, 2024. "Financial development in Africa: Do expenditure and population matter? Evidence through pooled mean group and generalized method of moments estimators," Journal of International Development, John Wiley & Sons, Ltd., vol. 36(1), pages 728-750, January.
    16. International Monetary Fund, 2016. "El Salvador: Selected Issues," IMF Staff Country Reports 2016/209, International Monetary Fund.

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    More about this item

    Keywords

    Government Borrowing; Private Credit; Domestic Banking Sector; Crowding Out; Private Investment; Lazy Banks;
    All these keywords.

    JEL classification:

    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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