Long Run and Short Run Linkages Between Credit and Output

Abstract

An appropriate link between the financial sector and real sector is required to have a balanced growth and development of a country as well as its regional levels particularly for the countries whose financial developments are not being saturated. In the present study, the authors have examined whether there are long run equilibrium relation between financial development (proxied by commercial bank credit) and real sector's development (proxied by net district domestic products) and short run causations for the districts of the state of West Bengal in India for the period 1993-2014. Applying the Engel-Granger cointegration and Granger causality approaches, the study reveals that there are cointegrating relations between credit and domestic products of the 13 districts out of which errors are corrected for 10 districts. Further, there are unilateral causal relations between the variables in nine districts with 11 producing no such causal relations. The study thus prescribes for strengthening the two sectors' developments so that there can be appropriate linkages between credit and output across the district levels in the longer runs.