Creditor Protection and Credit Response to Shocks. The World Bank Economic Review

This article studies the relationship between creditor protection and credit responses to macroeconomic shocks. Using a data set on legal determinants of finance in a panel of data on aggregate credit growth for 79 countries during 1990–2004, it is shown that credit is more responsive to external shocks in countries with weak legal creditor protection and weak enforcement. The results are statistically and economically sig-nificant and robust to alternative measures of creditor protection, to the inclusion of variables that reflect different stages of economic development, to the restriction of the sample to only developing economies, to the controls for systemic crises, to alternative shock measures, and to vector autoregressive specifications. JEL codes: G31, G33, K2. A well-documented feature in recent literature on law and finance is that strong institutions foster the development of financial markets. One strand of the literature has shown that an institutional setup that adequately protects credi-tor rights (CR) can align the incentives of debtors and lenders, increase the expected payoffs of lending, and deepen financial markets.1 Less documente