Abstract
Studies on the finance-growth link use different proxy variables for financial development. Among the most used is the total credit share in the GDP. Previous empirical studies show to be sensitive to the choice of the finance proxy indicator. Total credit share in the GDP appears biased in empirical modeling. Credit structure (loans to firms and households) prove to be more robust when used in the modeling. Credit structure reveals a different impact on economic growth showing lending policy impact varies depending on the credit structure. Researchers studying the finance-growth link must account for this when investigating supply leading and demand-following theories. Policymakers should also take care of the credit structure since loans to household discourage growth in the long run and are sensitive to economic shocks. We find empirical evidence to support both supply leading and demand- following theory. Bi-directional causality between private loans to firms/households and economic growth exists using Granger causality test. Private loans to firms and households economic growth exists using Granger causality test. Private loans to firms and households have a positive impact on economic growth in Croatia.
Highlights
There is a long going debate on the relationship between financial development and economic growth
The nexus between financial development and economic growth depends on monetary policy tightness which determines the private credit structure as this study show
Results show that loans to firms versus loans to household have a different impact on economic growth
Summary
There is a long going debate on the relationship between financial development and economic growth. Benczúr, Karagiannis and Kvedaras (2017) study the impact of household and credits to non-financial corporations using generalized method of moments (GMM) Their results show that the finance-economic growth nexus shows non-linear properties and depend on the proxy used for financial development. To study the impact of bank credits structure on economic growth, we follow an individual approach of choosing Croatia as a country case. Past research on finance and economic growth nexus did not focus on the financial structure on economic growth, except for Benczúr et al (2017), studying developed (OECD) countries and not looking for long memory or non-linear effects. The empirical evidence still misses proving the theoretical idea behind the finance-economic growth nexus leaving the body of literature with an incomplete picture on the issue This research addresses these gaps in the literature, looking for a long memory pattern in the data. The article concludes with discuss of the theoretical and practical implications of the study results and directions for future research
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