Does Credit Expansion Matter for Growth? What the Data Show

This paper analyses the relationship between expansion of domestic credit to private sector relative to GDP and growth for a sample of 65 less developed countries over a long period, 1980-2006. Using causality tests at various lag-orders we find a strong evidence of mutual causation. We have used alternative dynamic panel data models such as mean group, pooled mean group and dynamic fixed effect. Hausman test suggests dynamic fixed effect model. While the mean group model suggests no relationship in either direction, the other two models show two opposite long-term relationships: credit to-growth relationship is negative whereas growth-to-credit link is positive.