State-run Banks, Money Growth, and the Real Economy

Within countries, individual state-run banks’ lending correlates with prior money growth, while otherwise similar private-sector banks’ lending does not. Aggregate credit and investment growth correlate with prior money growth more strongly in economies whose banking systems are more fully state-run. Size and liquidity differences between state-run and private-sector banks do not drive these results, and further tests discount broad classes of alternative causality scenarios. Tests exploiting heterogeneity in likely political pressure on state-run banks associated with e.g. central bank independence, privatizations, and election years are consistent with a command-and-control channel of pseudo-monetary policy operating via state-run banks.