Credit Market Development and Economic Growth

Abstract

We develop an endogenous growth model in which both investment and consumption are financed through credit markets. Our innovation is to consider both credit markets jointly, showing how credit conditions in each are related, and why this interdependency is an important determinant of the economy’s growth rate. Results demonstrate that the relationship between credit market development and economic growth is ambiguous. The model is empirically relevant, as it can explain why the effect of credit market development on economic growth appears to differ between high-, middle-, and low-income countries.