Causality Relationship between Financial Intermediation by Banks and Economic Growth: Evidence from Serbia

Abstract

This paper empirically examines the possible causal relationship between financial development and economic growth in Serbia. In this regard, the focus is on the development of financial intermediation by banks, considering the fact that the banking sector plays an important role in Serbian financial system. The empirical research is based on quarterly data for the period Q1 2004-Q4 2011 by using Toda-Yamamoto causality test. Our empirical findings suggest that process of economic growth contributes to process of financial deepening. On the other hand, the results indicate that there is a significant unidirectional causality that runs from both private enterprise credit to GDP and household credit to GDP to economic growth. Bidirectional causal relation is confirmed only between the share of bank credit to nonfinancial private sector in total domestic credit and economic growth rate.