Credit Development, Capital Accumulation And Endogenous Economic Growth

This paper reinvestigates the relationship between credit market development and economic growth in an endogenous growth model. In contrast to existing literature, which only considers entrepreneur credit markets, this paper incorporates consumer credit market into our model. The credit market conditions of entrepreneurs and consumers are related and depend on each other. The interactions between consumers and entrepreneurs are of importance for economic growth.By representing a decrease of the screening cost as credit market development, the mutual dependency of the equilibrium contracts to consumer and entrepreneurs and the growth rate are highlighted. We find that the relationship between credit market development and economic growth is ambiguous. In particular, in some stages of development the growth rate decreases as credit markets develop. Furthermore, in some situations development in the entrepreneur credit market is shown to have no effect on credit conditions of entrepreneurs and economic growth but influences credit conditions of consumers. The model is empirically relevant, as it can explain why the effect of credit market development on economic growth appears to differ between high-income and middle- and low-income countries.And finally we have empirically studied the relationship between credit market development and economic growth. We find that there exists a structural change in the relationship between credit market development and economic growth. Specifically, the effect of credit market development on economic growth is positive in the countries with relatively less-developed credit markets and negative in the countries with relatively developed credit markets. The findings support our theoretical implications provided in the previous sections.