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Does Government Debt Affect Bank Credit?

Authors


  • We express our special thanks to the editor and two anonymous referees for very useful suggestions that greatly improved the quality of the paper. We are also grateful to Mauro Costantini, Giovanni Ferri, Sandro Momigliano, Franco Peracchi, Enrico Perotti, Federico Signorini and Robert Waldmann for helpful discussions and comments on previous versions of this paper. We also thank the participants at seminars held at the International ‘Tor Vergata’ Conference on Banking and Finance, held in Rome, and at the Annual Conference of the Money Macro and Finance Research Group, held at the University of Birmingham. Andrew Henderson provided outstanding editorial support. The views are those of the authors and do not necessarily reflect those of the Bank of Italy and the Eurosystem.

Abstract

This paper analyses 43 countries from 1970 to 2010 to investigate the effect that public debt has on bank loans. The study is motivated by the need to understand the consequences of high public debt, a condition many countries are already experiencing or will experience in the next few years. Looking at the 40-year period, we find that the ratio of government debt to GDP has a negative association with the subsequent growth of bank credit. Our results hold using different econometric methods and controlling for variables such as the lagged value of bank loans, the occurrence of banking crises, per capita GDP, the inflation rate, trade openness, international investment position, stock market capitalization and countries' legal origin.

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