Reevaluating the role of public sector banks as a countercyclical policy tool : evidence of the credit channel in Latin America, 2000-2010

Abstract

Public sector bank ownership has been a topic of controversy in many countries, with critics noting the potential for inefficiency, corruption, and other distortions and supporters citing the development and specific sector objectives, as well as its counter-cyclicality to shocks and downturns. This paper tests for the existence of the credit channel in Latin America during 2000-2010, the pro-cyclicality of private domestic and foreign-owned bank credit, and the ability of public sector banks to act counter-cyclically over the economic cycle. Older studies that used bank-level data have found some evidence in favor of some of these hypotheses, and this paper opts for country-level data and also finds evidence in support of all the above hypotheses.