Abstract
Problem statement: This study investigated the relationship between credit market development and economic growth for Spain for the period 1976-2007 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 and investments on credit market development. This study aimed to investigate the short-run and the long-run relationship between bank lending, gross domestic product and inflation rate applying the Johansen cointegration analysis. Approach: To achieve this objective classical and panel unit root tests were carried out for all time series data in their levels and their first differences. 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% induces an increase of bank lending 0.08%, while an increase of inflation rate per 1% induces a relative decrease of bank lending per 0.56% and also an increase of investments rate per 1% induces an increase of bank credits per 0.18% in Spain. The estimated coefficient of error correction term is statistically significant and has a negative sign, which confirms that there is not any a problem in the long-run equilibrium between the examined variables. Conclusion: The empirical results indicated that economic growth and investment have a positive effect on credit market development, while inflation rate has a negative effect. Bank development is determined by the size of bank lending directed to private sector at times of low inflation rates leading to higher economic growth rates.
Highlights
The relationship between economic growth and because of the existence of idle balances in the banking credit market development has been an extensive system and because of the possibility of borrowing subject of empirical research
Bank development is determined by the size of bank lending directed to private sector at times of low inflation rates leading to higher economic growth rates
Businesses make new investments to all series that are used for the estimation are non-stationary in their levels, but stationary and integrated of order two I(2), in their second differences
Summary
The relationship between economic growth and because of the existence of idle balances in the banking credit market development has been an extensive system and because of the possibility of borrowing subject of empirical research. This study was to investigate the relationship between the availability of money in the financial sector economic growth and credit market development taking translates into credit creation to finance the economic into account the effect of inflation rate on credit market activity and results in higher growth. The literature on financial liberalization encourages efficient in providing these services, which enhance free competition among banks as the way forward to economic growth. According to Keynes (1936) study in a minimally can finance development more effectively than markets developed financial system, credit creation causes in developing economies and, in the case of state-
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