ANALYSIS OF THE LONG-RUN RELATIONSHIP BETWEEN ECONOMIC GROWTH AND BANK CREDIT AVAILABILITY IN SOUTH AFRICA.

Authors

  • Goodman Chakanyuka University of South Africa

DOI:

https://doi.org/10.47941/ijf.33
Abstract views: 235
PDF downloads: 120

Keywords:

Bank Credit, Business Cycles, Credit Extension, Cointegration, Vector Error Correction Model.

Abstract

Purpose: The purpose of this study was to Analyze of the Relationship between Business Cycles and Bank Credit Extension: Evidence from South Africa. The study sought establish the direction of causality between economic growth and bank credit growth in South Africa

Methodology: The econometric methodology is used to augment results of the survey study. Granger causality test technique is applied to the variables of interest to test for direction of causation between variables. The study uses quarterly data for the period of 1980: Q1 to 2013: Q4. Business cycles are determined and measured by Gross Domestic Product at market prices while bank-granted credit is proxied by credit extension to the private sector.

Results: Results revealed that, that there is a stable long-run relationship between macro-economic business cycles and real credit growth in South Africa. The results show that economic growth significantly causes and stimulates bank credit. The Granger causality test provides evidence of unidirectional causal relationship with direction from economic growth to credit extension for South Africa. The study results indicate that the case for demand-following hypothesis is stronger than supply-leading hypothesis in South Africa. Economic growth spurs credit market development in South Africa.

Unique contribution to theory, practice and policy: It proposes practical policy prescriptions to address challenges currently facing South Africa. The other major contribution of this study is that it shall open new avenues for further research on finding causality of the relationship between various proxies of economic growth and financial development adopting the VAR framework

Downloads

Download data is not yet available.

References

Akinboade, O.A and Makina, D. (2009): “Bank Lending and Business Cycle: South African Evidence.” African Development Review, Vol. 21 (3), 2009, pp 476-498.

Akinboade, O.A. and Makina, D. (2010): “Econometric Analysis of Bank Lending and Business Cycles in South Africa,” Journal of Applied Economics, 42: 29, 3803-3811, First Publication on 16 Jan 2009 (iFirst).

Bernanke, B. S. (1983): “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” Am. Econ. Rev., 1983(73): 257-276.

Bernanke, B. S. (2006): “Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective.” Speech at the Fourth ECB Central Banking Conference, Frankfurt, Germany, November 10, 2006.

Bernanke, B. S. and Gertler, M. (1995): “Inside the Black Box: The Credit Channel of Monetary Policy Transmission.” Journal of Economic Perspectives 9(4): 27-48.

Bernanke, B. S. and Lown, C. S. (1991): “The Credit Crunch,” Brooking Papers on Economic Activity, 205-239.

Bernanke, B., Gertler, M. and Gilchrist, S. (1994): “The financial accelerator and the flight to quality”, Review of Economics and Statistics, vol 78, pp1-15.

Bordo, M. D. and Haubrich, J. G. (2009): “Credit Market Turmoil, Monetary Policy and Business Cycles: A historical view.” Federal Reserve Bank of Cleveland, Working Paper 15389, available on http://www.nber.org/papers/wi5389

Dell’Ariccia, G., Igan, D and Laeven, L. (2009): “Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market.” European Banking Centre Discussion Paper No. 2009-145.

Dlamini, S. N (2008): “Bank Credit Extension to the Private Sector and Inflation in South Africa”. Unpublished Master’s Thesis, Rhodes University.

Fourie, L., Botha, I and Mears, R. (2011): “Credit Extension in South Africa: A business cycle perspective for the period 1985 to 2009”. African Journal of Business Management, Vol. 5(34), pp. 13074-13083, 28 December 2011.

Holmstrom, B. and Tirole, J. (1997): “Financial Intermediation, Loanable Funds, and the Real Sector,” Quarterly Journal of Economics: 112, 663-691

Jorda, O., Schularic, M.H.P. and Taylor, A.M. (2011): “When Credit Bites Back: Leverage, Business Cycles and Crises.” NBER Working Paper 17621. Available

Khomo, M. M. and Aziakpono, M. J. (2007): “Forecasting Recession in South Africa: A Comparison of the yield curve and other economic indicators’, South African Journal of Economics, Vol. 75:2 June 2007; pp194-211.

Kiyotaki, N and Moore, J. (1997): “Credit cycles”, Journal of Political Economy, Vol. 105, no. 2, pp 211-48.

Marcus, G. (2011): “Statement of the Monetary Policy Committee” SARB, MPC 21 July 2011.

Marcus, G. (2013): “Statement of the Monetary Policy Committee” SARB, MPC 20 March 2013.

Meh, C. and Moran, K. (2004): “Bank Capital, Agency Costs and Monetary Policy,” Discussion Paper.

Mendoza. E. G. and Terrones, M. E (2008): “An Anatomy of Credit Booms: Evidence from Macro Aggregates and Firm Level Data” Financial Cycles, Liquidity and Securitization Conference, 18 April, 2008, IMF.

Odhiambo, N. M. (2004): “Is Financial Development Still a Spur to Economic Growth? A Causal Evidence from South Africa,” Savings and Development, XXV111(1), PP.47-62.

Owens, R. E and Schreft, S. L. (1993): “Identifying Credit Crunches”. Federal Reserve Bank, Richmond Economic Review, Working Paper, 93-2.

Patrick, T. H. (1966): “Financial Development and Economic Growth in Undeveloped Countries,” Economic Development and Cultural Change, 14, pp.174-189

Quagliariello, M (2007): “Banks’ riskiness over the business cycle: a panel analysis on Italian intermediaries”. Applied Financial Economics, 2007, 17 pp119-138.

Rannenberg, A (2012): “Asymmetric information in credit markets, bank leverage cycles and macroeconomic dynamics”. Working Paper Research No. 224 April 2012, National Bank of Belgium.

Rannenberg, A (2012): “Asymmetric information in credit markets, bank leverage cycles and macroeconomic dynamics”. Working Paper Research No. 224 April 2012, National Bank of Belgium.

Seremak, V. (2001): “Credit Cycles- Theory and Application on the Czeck Republic”. January 2001.

Xu, T. (2010): “The Role of Credit in International Business Cycles”. Bank of Canada Working Paper 212-36, November 2012.

Downloads

Published

2017-01-24

How to Cite

Chakanyuka, G. (2017). ANALYSIS OF THE LONG-RUN RELATIONSHIP BETWEEN ECONOMIC GROWTH AND BANK CREDIT AVAILABILITY IN SOUTH AFRICA. International Journal of Finance, 1(1), 1–17. https://doi.org/10.47941/ijf.33

Issue

Section

Articles