Lazy Banks? Government Borrowing and Private Credit in Developing Countries
32 Pages Posted: 11 Jun 2009
Date Written: June 11, 2009
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 government reduces 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.
Keywords: Government Borrowing, Private Credit, Domestic Banking Sector, Crowding Out, Private Investment, Lazy Banks
JEL Classification: O23, H62
Suggested Citation: Suggested Citation