Credit policy and the ‘debt shift’ in advanced economies

The decline in the share of bank credit to non-financial firms since the 1990s, relative to credit for real estate and financial asset markets, has raised concerns over economic growth and financial stability and sparked renewed interest in credit policies, instruments and institutions. We examine their theoretical case and post-war use, and trace their demise during the wider market-oriented policy reconfiguration from the 1980s. Notably, this included home ownership polices favouring mortgage markets. We then examine the empirical relationship between credit policy and credit allocation in the 1973–2005 period for 17 advanced economies. Taking account of co-integration, we present evidence that the decline of credit policies is significantly associated with a lower share of lending to non-financial firms. It may be worth revisiting the potential of credit policies to support adequate financing for goals such as innovation, industrial development and the transition to a low-carbon economy.