ABSTRACT
This paper examines a broad range of driving factors of credit expansion using long-term cross-country panel data from 1994 to 2018 and the System GMM method. We discuss the role of macroeconomic fundamentals in explaining credit expansion by examining five categories of explanatory variables. Some structural patterns of weak linkages of credit expansion with macroeconomic fundamentals are identified. We further explore the possible causes that follow the theoretical logic of risk-taking in the private and public sectors. Controlling for the influence of macroeconomic fundamentals, we find the effects of various financial system characteristics, such as institutional features of the financial system, financial institutions' performance, asset markets booms, and macroeconomic and financial regulatory environment, on inducing credit expansion over the needs supported by macroeconomic fundamentals. Our study provides strong implications on regulatory policies on the rising credit during the COVID-19 Pandemic.