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

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

Creative Commons License

Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.

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