Topics in Middle Eastern and North African Economies
Document Type
Article
Publication Date
9-1-2014
Abstract
Driven by the observed growing budget deficit and the heavy reliance on debtfinancing from the banking sector, this study sets to test the lazy banking hypothesis for Egypt. According to this hypothesis, government borrowing crowds out private investment through its dampening effect on private credit. The study estimates a VAR model using quarterly data spanning for almost four decades. The estimated model has unearthed a number of interesting results. As the government issues more debt instruments to finance its deficit, banks shift their portfolio away from risky private loans and opt for lazy behavior characterized by a shrinking overall credit tilted more and more toward government debt-instruments. This behavior not only limits their exposure to the private sector, hence reducing private investment, but also adversely affects investment and hence overall growth potential. In addition, evidence shows that output growth positively impacts the willingness of the banking sector to extend more credit to both the government and the private sector. Finally, and consistent with the lazy bank model, impulse response functions show that the effect of a government borrowing shock is contractionary (as opposed to the effect of private credit shock which is slightly expansionary) with regard to the overall banking sector credit
Identifier
2334-282X
Journal Title
Topics in Middle Eastern and North African Economies
ISSN
2334-282X
Publisher
Middle East Economic Association and Loyola University Chicago
Volume
16
Recommended Citation
Shetta, Samah and Kamaly, Ahmed, "Does the Budget Deficit Crowd-Out Private Credit From the Banking Sector? The Case of Egypt". Topics in Middle Eastern and North African Economies, electronic journal, 16, Middle East Economic Association and Loyola University Chicago, 2014, http://www.luc.edu/orgs/meea/
Creative Commons License
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Copyright Statement
© 2014 the authors
Comments
Presentation of the articles in the Topics in Middle Eastern and North African Economies was made possible by a limited license granted to Loyola University Chicago and Middle East Economics Association from the authors who have retained all copyrights in the articles. http://www.luc.edu/orgs/meea/volume16/meea16.htm