Does the monetary policy regime matter in the effect of credit on growth?

Abstract

This study sheds light on the finance–growth link by (i) carefully taking into account the lessons learned from the empirical literature, (ii) extending the period of analysis to include the years following the global financial crisis (GFC), (iii) adding the monetary-policy regime as a concomitant factor in this relation, and (iv) running different specifications and following a robust econometric approach. We find that the positive effect of finance via credit vanishes between the end of the 1990s and the beginning of the 2000s, coinciding with most countries reaching a high level of bank credit and with the GFC. This finding is also observed if an inverted U-shaped specification is used to capture the relation between finance and growth. As for the monetary-policy regime, the results reveal that the inflation-targeting strategy does not exert a positive influence on economic growth.