BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 15/2015:
Causality between credit depth and economic growth: Evidence from 24 OECD countries
Mikhail Stolbov ()
Abstract: Causality between the ratio of domestic private credit to
GDP and growth in real GDP per capita is investigated in a
country-by-country time-series framework for 24 OECD economies over the
period 1980–2013. The proposed threefold methodology to test for causal
linkages integrates (i) lag-augmented VAR Granger causality tests, (ii)
Breitung-Candelon causality tests in the frequency domain, and (iii)
testing for causal inference based on a fully modified OLS (FMOLS)
approach. For 12 of 24 countries in the sample, the three tests yield
uniform results in terms of causality presence (absence) and direction.
Causality running from credit depth to economic growth is found for the UK,
Australia, Switzerland, and Greece. The findings lend no support to the
view that financial development shifts from a supply-leading to
demand-following pattern as economic development proceeds. The aggregate
results mesh well with the current discussion on “too much finance” and
disintermediation effects. However, idiosyncratic country determinants also
appear significant.
Keywords: causality; economic growth; financial development; FMOLS; frequency domain; (follow links to similar papers)
JEL-Codes: C22; E44; G21; O16; (follow links to similar papers)
38 pages, April 30, 2015
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