(or the GDP Deflator) — the number of transactions in the economy (the average price of transactions) — results in a one-percent increase in the demand for credit. Although this assumption might be reasonable for some economies, for many others, particulary developing countries, it will be violated because of the varying levels of credit usage in economic transactions.<sup>4</sup> The studies by Cottarelli _et al._ (2005) and Egert<sup> ́</sup> _et al._ (2006) also consider the effects of changes in development and structural indicators on equilibrium credit demand. They do so by inserting low frequency development and structural indicators into the credit demand equation (the conditional mean equation of credit), together with higher frequency variables that determine credit demand over the business cycle. This approach, however, does not allow for the possibility that the sensitivity of credit to GDP in more credit intensive economies is likely to be higher than in less credit intensive ones. Moreover, especially in time-series panels that include a limited number of countries as in Cottarelli _et al._ (2005), the development and structural indicators, which change only at a very low frequency, fail to identify any material effects of the indicators on equilibrium credit. Further, mixing higher frequency variables such as GDP, prices and interest rates measured on a basis with low indicators like liberalization or quarterly frequency financial public governance, which change typically over a period longer than a business cycle, is likely to result in statistical collinearity between the long-term and short-term indicators when both are measured at quarterly frequency. This collinearity will make it difficult to identify the true effects of the long-term indicators on equilibrium credit and derive any reliable policy recommendation.

The objective of this study is to propose a structural framework to estimate equilibrium credit, which is anchored in the long-run transaction demand for credit by the real economy, and accounts for the effects of economic and financial development on equilibrium credit. The proposed framework consists of two stages. First, we estimate country specific credit demand functions and conduct cross-country poolability tests on the income and price elasticities of credit. This step is implemented using the Mean Group (MG) and Pooled Mean Group (PMG) estimation methods of Pesaran and Smith (1995) and Pesaran _et al._ (1999) and quarterly panel data for high- and middle-income countries over the period 1980 _−_ 2010.

Second, we model the cross-country variation in the income and price elasticities of credit, as well as the speed of adjustment of credit to its long-run equilibrium, by regressing the country specific coefficients on a set of relevant development indicators. To 4 As an example, consider the countries of the US and Croatia. Taking the credit-to-GDP ratio as the dependent variable to model credit demand would imply that the use of credit in economic transactions in these economies is the same. This seems hard to rationalise. One would clearly expect that US consumers and businesses use credit much more frequently in their transactions than consumers and businesses in Croatia.

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