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WDR 2014

Equilibrium Credit: Providing Not Too Much, Not Too Little Credit to the Economy

Martin Melecky's picture

Credit is actively used by only about 8 percent of people in developing countries and about 14 percent in developed countries (World Bank Findex). The observed gaps in financial inclusion thus suggest that greater access to credit is warranted.

However, finance can be a double-edged sword. Rapid financial development and deepening can cause accumulation of systemic risk and lead to costly financial crises (Reinhart and Rogoff 2009). Banking crises in Thailand (1997), Colombia (1982), and Ukraine (2008), for example, were preceded by excessive credit growth of 25 percent, 40 percent, and 70 percent per year, respectively. Providing the right amount of credit—not too much and not too little—is thus a major concern for countries and their policy makers.

When credit provision becomes excessive or insufficient is judged against an unobserved benchmark known as equilibrium credit. Estimating equilibrium credit is one of the most challenging tasks of determining excessive or insufficient credit provision.

Avoiding the “Planning Paradox”: The New World Bank Strategy Must Take Risk and Uncertainty into Account

Norman Loayza's picture

While effective risk management is essential for development, countries and institutions tend to ignore risks and uncertainty when planning ahead. A recent blog from Norman Loayza discusses the importance of strengthening the integrated assessment of various types of risks at regional and national levels. Norman’s blog can be accessed in this link.