Effect of abnormal credit expansion and contraction on GDP per capita in ECOWAS countries

Abstract

We investigate the impact of abnormal credit expansion and contraction on the GDP per capita of ECOWAS countries. We analyse abnormal credit from two dimensions: first, the impact of abnormal credit contraction on GDP per capita, and second, the impact of abnormal credit expansion on GDP per capita. Using data for 10 ECOWAS countries from 1993 to 2021, we find evidence that abnormal credit contraction reduces the GDP per capita of ECOWAS countries. We also find some evidence that abnormal credit expansion reduces the GDP per capita of ECOWAS countries. More specifically, a unit increase in abnormal credit contraction decreases GDP per capita by 0.99 percent while a unit increase in abnormal credit expansion decreases GDP per capita by only 0.1 percent. The findings confirm that ‘ too little’ or ‘too much ’ credit does not improve economic output per person in immature financial systems. We also observe that banking sector solvency and a strong legal system have a positive effect on the GDP per capita of ECOWAS countries while banking sector efficiency has a negative effect on GDP per capita. that abnormal credit contraction reduces the GDP per capita of ECOWAS countries. This indicates that abnormal cuts in credit to the private sector lowers economic output per person in ECOWAS countries. We also find some evidence that abnormal credit expansion reduces the GDP per capita of ECOWAS countries. This indicates that abnormal increases in credit to the private sector lowers economic output per person in ECOWAS countries.