Does Local Credit Matter? The Spanish Case

• Authors: Luz Mary Pinzón and Xavier Freixas.
• BSE Working Paper: 1512 | September 25

This paper investigates the relationship between financial development and economic growth, using data from Spanish provinces during a period marked by significant financial events: banking deregulation (1988), a credit and housing boom (2001–2007), and a severe banking crisis (2008–2012). The study pursues three key objectives. First, it examines the impact of credit— distinct from the broader financial environment and institutional infrastructure (e.g., property rights enforcement, accounting standards)—on long-term real per capita GDP growth. Second, it analyzes whether this effect diminishes as the level of credit increases. Third, it evaluates the role of mortgage lending in shaping long-term growth. Our findings indicate that credit exerts a positive influence on both five- and ten-year cumulative growth rates, independent of the broader financial environment, which is largely homogeneous across provinces.At the same time, we observe that the marginal contribution of credit to long-term growth declines as credit levels rise.Despite this diminishing marginal effect, we find no evidence of a “too much of a good thing” effect as: higher credit-to-GDP ratios continue to exert a consistently positive impact. Finally, regarding mortgage credit, we do not find any positive effect of this variable on long-term growth.