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Credit Market Development and Economic Growth

Author(s): Athanasios Vazakidis | Antonios Adamopoulos

Journal: American Journal of Economics and Business Administration
ISSN 1945-5488

Volume: 1;
Issue: 1;
Start page: 34;
Date: 2009;
Original page

Keywords: Credit market | economic growth | vector error correction model

Problem statement: This study investigated the relationship between credit market development and economic growth for Italy for the period 1965-2007 using a Vector Error Correction Model (VECM). Questions were raised whether economic growth spurs credit market development taking into account the negative effect of inflation rate on credit market development. The purpose of this study was to investigated the short-run and the long-run relationship between the examined variables applying the Johansen cointegration analysis. Approach: For this purpose unit root tests were carried out according to Dickey-Fuller (1979. Johansen cointegration analysis was applied to examine whether the variables are cointegrated of the same order taking into account the maximum eigenvalues and trace statistics tests. Finally, a vector error correction model was selected to investigate the long-run relationship between economic growth and credit market development. Results: A short-run increase of economic growth per 1% induced an increase of bank lending 0.4% in Italy, while an increase of inflation rate per 1% induced a relative decrease of bank lending per 0.5% in Italy. The estimated coefficient of error correction term was statistically significant and had a negative sign, which confirmed that there was not any a problem in the long-run equilibrium between the examined variables. Conclusion: The results suggested that economic growth has a positive effect on credit market development, while inflation rate had a negative effect. Bank development was determined by the size of bank lending directed to private sector at times of low inflation rates leading to higher economic growth rates.
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