Creditor Protection and Credit Response to Shocks

Abstract

This paper studies the relationship between creditor protection and credit response to macroeconomic shocks. Using a dataset on legal determinants of finance in a panel of data of aggregate credit growth for a sample of 79 countries during the period 1990-2004, it shows that credit is more responsive to external shocks in countries with weak legal creditor protection and weak enforcement. 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, the restriction of the sample to only developing countries, controlling for systemic crises, alternative shock measures, and to VAR specifications.

Keywords: Law and Finance, Credit, Volatility

JEL Classification: G31, G33, K2