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Creditor Protection and Credit Volatility

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  • Arturo Galindo
  • Alejandro Micco

Abstract

This paper studies the relationship between creditor protection and credit volatility. During the negative phase of the business cycle, credit contracts more in countries with poor creditor protection. For similar shocks to business conditions, credit is more volatile in countries where creditors are de facto weakly protected. We test this idea using a dataset on legal determinants of finance in a panel of data of aggregate credit growth for a sample of 139 countries during the period 1990-2003. We find support for the view that better legal protections significantly reduce the impact of exogenous shocks on credit. The results are statistically and economically significant and robust to alternative measures of creditor protection, the inclusion of variables that reflect different stages of economic development and the restriction of our sample to only developing countries.

Suggested Citation

  • Arturo Galindo & Alejandro Micco, 2005. "Creditor Protection and Credit Volatility," Research Department Publications 4401, Inter-American Development Bank, Research Department.
    • Handle: RePEc:idb:wpaper:4401
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    Cited by:

    1. Ricardo Caballero & Kevin Cowan, 2006. "Financial Integration Without the Volatility," Working Papers Central Bank of Chile 387, Central Bank of Chile.
    2. Razin, Assaf & Hale, Galina & Tong, Hui, 2007. "Creditor Protection and Stock Price Volatility," CEPR Discussion Papers 6540, C.E.P.R. Discussion Papers.
    3. Galina Hale & Assaf Razin & Hui Tong, 2009. "The impact of creditor protection on stock prices in the presence of credit crunches," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    4. Irwan Trinugroho & Agusman Agusman & Mochammad Doddy Ariefianto & Darsono Darsono & Amine Tarazi, 2015. "Determinants of cross regional disparity in financial deepening: Evidence from Indonesian provinces," Economics Bulletin, AccessEcon, vol. 35(2), pages 896-910.
    5. Galina Hale & Assaf Razin & Hui Tong, 2012. "The Impact of Creditor Protection on Stock Prices in the Presence of Liquidity Crises: Theory and Cross-country Evidence," CESifo Working Paper Series 3765, CESifo.
    6. Razin, Assaf & Hale, Galina & Tong, Hui, 2008. "Creditor Protection, Contagion, and Stock Market Price Volatility," CEPR Discussion Papers 6658, C.E.P.R. Discussion Papers.
    7. Razin, Assaf & Hale, Galina & Tong, Hui, 2007. "Credit Constraints and Stock Price Volatility," CEPR Discussion Papers 6310, C.E.P.R. Discussion Papers.
    8. Galina Hale & Assaf Razin & Hui Tong, 2008. "Credit Crunch, Creditor Protection, and Asset Prices," Working Papers 162008, Hong Kong Institute for Monetary Research.
    9. Cesar Tamayo, 2015. "Investor protection and optimal contracts under risk aversion and costly state verification," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(3), pages 547-577, August.
    10. Kutan, Ali M. & Ozsoz, Emre & Rengifo, Erick W., 2012. "Cross-sectional determinants of bank performance under deposit dollarization in emerging markets," Emerging Markets Review, Elsevier, vol. 13(4), pages 478-492.
    11. Mr. Pablo F Druck & Mr. Alexander Plekhanov & Mr. Mario Dehesa, 2007. "Relative Price Stability, Creditor Rights, and Financial Deepening," IMF Working Papers 2007/139, International Monetary Fund.
    12. Olaberria, Eduardo & Rigolini, Jamele, 2009. "Managing East Asia's macroeconomic volatility," Policy Research Working Paper Series 4989, The World Bank.
    13. Roberto Gallardo Del Angel & Yiwen Xu, 2023. "Credit rationing, institutions and local public debt," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 18(2), pages 1-21, Abril - J.

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