Relationship between banks’ credit activity and economic growth: An empirical research for the Republic of Serbia
Keywords:
credit activity of banks, economic growth, VAR model, causality in Grange sense, Republic of Serbia
Abstract
The subject of the research in this paper is the interactive relationship between banks’ credit activity and economic growth. Consequently, the aim of the paper is to examine the existence and direction of causal relation between credit activity of banking sector and the overall economic activity in the Republic of Serbia. For the purposes of the survey are gathered quarterly data related to the period 2003–2019. As indicators of credit activity in the study are used the share of loans granted to enterprises in GDP and the share of loans granted to households in GDP, while the rate of growth of real GDP is determined as an indicator of economic growth. Since the observed time series are of different order of integration, the analysis is conducted within the VAR model, with the application of Toda-Yamamoto procedure of the Granger causality test. The results of research show that there is significant unidirectional causal relationship according to Granger which comes from the direction of bank’s credit activity towards economic growth. The results of the analysis can be particularly useful to economic policy measures creators, as well as to creators of development strategies.
References
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Ono, S. (2017). Financial development and economic growth nexus in Russia. Russian Journal of Economics, 3(3), 321-332. doi:10.1016/j.ruje.2017.09.006
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Sims, C. (1980). Macroeconomics and Reality. Econometrica, 48, 1-48. doi:10.2307/1912017
Škare, M., Sinković, D., & Porada-Rochoń, M. (2019). Financial Development and Economic Growth in Poland 1990–2018. Technological and Economic Development of Economy, 25(2), 103-133. doi:10.3846/tede.2019.7925
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Zeqiraj, V., Hammoudeh, S., Iskenderoglu, O., & Kumar Tiwari, A. (2020). Banking sector performance and economic growth: evidence from Southeast European countries. Post-Communist Economies, 32(2), 267–284, DOI: 10.1080/14631377.2019.1640988
Awad, I.M., & Al Karaki, M.S. (2019). The impact of bank lending on Palestine economic growth: an econometric analysis of time series data. Financial Innovation 5, 14, doi:10.1186/s40854-019-0130-8
Beck, T., Buyukkarabacak, B., Rioja, F., & Valev, N. (2008). Who gets the credit ? and does it matter ? household vs. firm lending across countries (Policy Research Working Paper Series 4661). Washington, D.C.: World Bank.
Černohorský, J. (2017). Types of bank loans and their impact on economic development: a case study of the Czech Republic. E&M Ekonomie a Management, 20(4), 34-48. doi:10.15240/ tul/001/2017-4-003.
Calderón, C., & Liu, L. (2003). The Direction of Causality between Financial Development and Economic Growth. Working Paper No 184, Central Bank of Chile.
Cojocaru, L., Hoffman, S., & Miller, J. (2011). Financial Development and Economic Growth in Transition Economies: Empirical Evidence from the CEE and CIS Countries. Working Paper No 2011-22, Department of Economics, University of Delaware.
Demetriades, P. O., & Hussein, K. A. (1996). Does Financial Development Cause Economic Growth? Time Series Evidence from 16 Countries. Journal of Development Economics, 51(2), 387–411. doi:10.1016/S0304-3878(96)00421-X
Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49 (4), 1057–1072. doi:10.2307/1912517
Duican, E,R, & Pop, A. (2015). The implications of credit activity on economic growth in Romania. Procedia Economics and Finance, 30, 195 – 201. https://doi.org/10.1016/S2212-5671(15)01286-1
Eggoh, J.C., & Villieu, P. (2014). A simple endogenous growth model of financial intermediation with multiplicity and indeterminacy. Economic Modelling, 38, 357-366. doi:10.1016/j.econmod.2014.01.017
Garcia-Escribano, M., & Han, F. (2015). Credit Expansion in Emerging Markets: Propeller of Growth?. IMF Working Paper 15/2012. Retrieved from https://www.imf.org/external/pubs/ft/wp/2015/wp15212.pdf
Gozgor, G. (2015). Causal relation between economic growth and domestic credit in the economic globalization: Evidence from the Hatemi-J’s test. The Journal of International Trade & Economic Development, vol. 24, no. 3, 395-408, DOI: 10.1080/09638199.2014.908325
Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424-438. doi:10.2307/1912791
Grbic, M. (2016). Interaction between financial intermediation efficiency and economic growth. Economic Horizons, 18(3), 241–254. doi:10.5937/ekonhor1603247G
Gural, A., & Lomachynska, I. (2018). FDI AND FINANCIAL DEVELOPMENT AS DETERMINANTS OF ECONOMIC GROWTH FOR V4 COUNTRIES. Baltic Journal of Economic Studies. 3(4), 59-64. doi:10.30525/2256-0742/2017-3-4-59-64
Iqbal, M.Z., Ahmad, N., & Hussain, Z. (2012). Impact of Savings and Credit on Economic Growth in Pakistan, Pakistan Journal of Social Sciences (PJSS), vol. 32, no. 1, pp. 39- 48.
Iwanicz-Drozdowska, M., Bongini, P., Smaga, P., & Witkowski, B. (2019). The role of banks in CESEE countries: exploring non-standard determinants of economic growth, Post-Communist Economies, 31(3), 349-382, DOI: 10.1080/14631377.2018.1505694
Jedidia, K.B., Boujelbene, T., & Helali, K. (2014). Financial Development and Economic Growth: New Evidence from Tunisia. Journal of Policy Modeling, 36(5), 883–898. DOI:10.1016/j.jpolmod.2014.08.002
Jovičić, M., & Dragutinović Mitrović, R. (2011). Ekonometrijski metodi i modeli. Centar za izdavačku delatnost Ekonomskog fakulteta u Beogradu, Beograd.
Kabashi, R. & Suleva, K. (2016). Loan Supply Shocks in Macedonia: A Bayesian SVAR Approach with Sign Restrictions. Croatian Economic Survey, 18 (1), 5-33. https://doi.org/10.15179/ces.18.1.1
Kelly, R., McQuinn, K., & Stuart, R. (2013). Exploring the Steady-State Relationship between Credit and GDP for a Small Open Economy: the Case of Ireland. ECB Working Paper 1531, Frankfurt: European Central Bank. Retrieved from https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1531.pdf
King, R.G. & Levine, R. (1993a). Finance, Entrepreneurship, and Growth: Theory and Evidence. Journal of Monetary Economics, 32, 513-542.
King, R.G., & Levine, R. (1993b). Finance and Growth: Schumpeter Might Be Right. Quarterly Journal of Economics, 108(3), 717-737.
Koivu, T. (2002). Do efficient banking sectors accelerate economic growth in transition economies?. Discussion Paper No 14. Bank of Finland, Institute for Economies in Transition.
Korkmaz, S. (2015). Impact of Bank Credits on Economic Growth and Inflation. Journal of Applied Finance & Banking, vol. 5, no. 1, pp. 57-69.
Lakštutienė A., & Barkauskaitė A. (2016). Evaluation of relationship between banks lending activities and the economies in Baltic countries. Copernican Journal of Finance & Accounting, 5(1), 141– 156. http://dx.doi.org/10.12775/CJFA.2016.008
Leitão, N.C. (2012). Bank Credit and Economic Growth: a Dynamic Panel Data Analysis, The Economic Researrch Guarrdian, vol. 2(2), pp. 256-267.
Levine, R. (1998).The Legal Environment, Banks, and Long-Run Economic Growth. Journal of Money, Credit, and Banking, 30(3), 596-613. DOI: 10.2307/2601259
Levine, R., & Zervos, S. (1998). Stock Markets, Banks, and Economic Growth. The American Economic Review, 88(3). 537-558. https://www.jstor.org/stable/116848?seq=1
Liang, Q., & Teng, J.Z. (2006). Financial Development And Economic Growth: Evidence From China, China Economic Review, 17(4) , 395-411. doi:10.1016/j.chieco.2005.09.003
Mehl, A., Vespro, C., & Winkler, A. (2005). The finance-growth nexus and financial sector environment: new evidence from Southeast Europe. Conference on European Economic Integration, Austrian National Bank, Vienna.
Mushtaq, S. (2016). Causality between bank’s major activities and economic growth: evidences from Pakistan. Financial Innovation 2, 7, doi:10.1186/s40854-016-0024-y
Ono, S. (2017). Financial development and economic growth nexus in Russia. Russian Journal of Economics, 3(3), 321-332. doi:10.1016/j.ruje.2017.09.006
Petkovski, M., & Kjosevski, J. (2014). Does banking sector development promote economic growth? An empirical analysis for selected countries in Central and South Eastern Europe. Economic Research-Ekonomska Istraživanja, 27:1, 55-66, DOI: 10.1080/1331677X.2014.947107
Ramanauskas, T. (2005). Assessment of Bank Credit Growth from Macroeconomic Perspective, Pinigų studijos, 2005/3, pp. 78-97.
Rambaldi, A. N., Doran, H. E. (1996). Testing for Granger Non-Causality in Cointegrated Systems Made Easy, Working Paper in Econometrics and Applied Statistics, 88, University of New England.
Rousseau, P.L., Wachtel, P. (2002). “Inflation thresholds and the finance–growth nexus”, Journal of International Money and Finance, 21, pp. 777-793.
Sims, C. (1980). Macroeconomics and Reality. Econometrica, 48, 1-48. doi:10.2307/1912017
Škare, M., Sinković, D., & Porada-Rochoń, M. (2019). Financial Development and Economic Growth in Poland 1990–2018. Technological and Economic Development of Economy, 25(2), 103-133. doi:10.3846/tede.2019.7925
Toda, H. Y., & Yamamoto, T. (1995). Statistical inferences in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66(1-2), 225-250. doi:10.1016/0304-4076(94)01616-8
Zeqiraj, V., Hammoudeh, S., Iskenderoglu, O., & Kumar Tiwari, A. (2020). Banking sector performance and economic growth: evidence from Southeast European countries. Post-Communist Economies, 32(2), 267–284, DOI: 10.1080/14631377.2019.1640988