Lazy Banks? Government Borrowing and Private Credit in Developing Countries

32 Pages Posted: 11 Jun 2009

See all articles by M. Shahe Emran

M. Shahe Emran

George Washington University - Department of Economics

Subika Farazi

World Bank

Date Written: June 11, 2009

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 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

Emran, M. Shahe and Farazi, Subika, Lazy Banks? Government Borrowing and Private Credit in Developing Countries (June 11, 2009). Available at SSRN: https://ssrn.com/abstract=1418145 or http://dx.doi.org/10.2139/ssrn.1418145

M. Shahe Emran (Contact Author)

George Washington University - Department of Economics ( email )

2115 G Street NW
302 Monroe Hall
Washington, DC 20052
United States

Subika Farazi

World Bank ( email )

1818 H Street NW
Washington, DC 20433
United States

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