What do theory and previous empirical evidence say?
While theory has suggested ample mechanisms through which enterprise credit helps economic growth, it provides ambiguous predictions about the effect of household credit on economic growth. Jappelli and Pagano (1994) argue that alleviating households’ credit constraints reduces the savings rate, with negative repercussions for economic growth. Specifically, they show for a sample of 25 middle- and high-income countries that lower liquidity constraints on households, proxied by the loan-to-value ratio for mortgages, are associated with a lower savings rate and lower GDP per capita growth. On the other hand, Galor and Zeira (1993) and De Gregorio (1996) argue that household credit can foster economic development if it increases human capital accumulation. De Gregorio (1996) shows, for a sample of 20 OECD countries, that higher loan-to-value ratios are associated with higher secondary school enrolment, though not with economic growth. Both theory and previous empirical work thus provide a
