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The Effect of Pandemics on Domestic Credit: A Cross-country Analysis

Using a panel of 140 countries covering the period 1996-2018, this paper examines how pandemics influence the lending behavior of banks. We take advantage of a new index developed by Ahir et al. (2020) which measures discussions about pandemics at the country level. The results of the fixed-effects and the two-step system GMM estimations reveal that pandemics significantly hamper domestic credit available to the private sector. The negative effect of pandemics on credit levels is observed to be more prevalent for the low-income & emerging economies and non-OECD countries. The findings can provide insights for predicting the effect of recent COVID-19 pandemic on the behavior of credit market participants.