Correlated lending to government and the private sector: what do we learn from the Great Recession?

Abstract

PurposeThe purpose of the study is to investigate the correlation between credit supply to government and credit supply to the private sector to determine whether there is a crowding-out or crowding-in effect of credit supply to government on credit supply to the private sector.Design/methodology/approachThe study used data from 43 countries during the 1980–2019 period. The study employed the Pearson correlation methodology to analyze the data.FindingsThere is a significant positive correlation between credit supply to government and credit supply to the private sector. There is also a significant positive relationship between credit supply to government and credit supply to the private sector, implying a crowding-in effect of government borrowing on private sector borrowing. The positive correlation between credit supply to government and credit supply to the private sector by banks is stronger and highly significant in the period before the Great Recession, while the positive correlation is weaker and less significant during the Great Recession, and the correlation further weakens after the Great Recession. The regional analyses show that the positive correlation between credit supply to government and credit supply to the private sector by banks is stronger and highly significant in the African region than in the Asian region and the region of the Americas.Originality/valueThere is no evidence on the correlation between credit supply to government and credit supply to the private sector during the Great Recession.