Credit Constraints, Political Instability, and Capital Accumulation

Preprint OPEN
Risto Herrala ; Rima Turk-Ariss (2013)
  • Subject: Egypt;Credit ceilings;Djibouti;Capital accumulation;Algeria;Bahrain;Kuwait;Jordan;Lebanon;Libyan Arab Jamahiriya;Iran, Islamic Republic of;Iraq;Middle East;Morocco;North Africa;Saudi Arabia;Qatar;Oman;United Arab Emirates;Transition economies;Tunisia;Syrian Arab Republic;West Bank and Gaza;Yemen, Republic of;credit constraints, political unrest, MENA countries, equity capital, real interest rate, equity ratio, capital goods, General,

We investigate the complex interactions between credit constraints, political instability, and capital accumulation using a novel approach based on Kiyotaki and Moore’s (1997) theoretical framework. Drawing on a unique firm-level data set from Middle-East and North Africa (MENA), empirical findings point to a large and significant effect of credit conditions on capital accumulation and suggest that continued political unrest worsens credit constraints. The results support the view that financial development measured by a relaxing of financial constraints is key to macroeconomic development.
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