Analysing the Importance of Bank Credit Channel
The paper by Dabla-Norris and Floerkemeier emphasized that serious impediment for full functionality of the credit channel of monetary transmission was high dependence of economic agents and their investment decisions on remittance inflows from abroad rather than on bank loans. The effectiveness of the bank lending channel was hampered by a huge share of foreign cash transactions in the shadow sector of Armenian economy. On the other hand, in order to examine the importance of active and inactive bank lending channel, Bakradze and Billmeier employed a VAR model with maximum two lags and quarterly, not seasonally adjusted data ranging from 1999Q1 to 2006Q4.
First, the authors concentrated on the baseline model with five variables (real GDP, CPI, currency in circulation, level of international reserves and nominal effective exchange rate), and then assessed each transmission channel separately. The study experimented with inclusion of the credit aggregate in the vector of endogenous variables and later in the vector of exogenous variables. Though the responses of output and inflation were positive and similar to the baseline, they were not significant. As a recommendation for benchmark short-term interest rates, the paper suggests to set up “a corridor for interbank interest rates, bound by standing overnight facilities”. Moreover, there was a belief that the National Bank of Georgia would gain more credibility if the fiscal authorities assist to facilitate the well-functioning primary and secondary markets for government securities.
On the contrary, the findings of Cevik and Teksoz indicated the relative dominance of the bank lending channel over the other transmission channels in the Gulf Cooperation Council (GCC) countries. To conclude so, the study considered the joint dynamic interaction between real non-hydrocarbon GDP, consumer prices, a broad measure of domestic credit and the nominal short-term interest rate. In addition, to address asymmetric information problem in financial markets and find a potential solution, the paper developed the idea of establishment of the regional network of credit bureaus operating within GCC countries.
Another recent study pursued by Hasanov and Huseynov examined relative importance of bank credits to non-oil economic growth in case of Azerbaijan. Using seasonally adjusted quarterly time series data spanning from 2000Q1 to 2009Q4 the authors employed cointegration methods with small sample bias correction and found a positive relationship between bank credit and economic growth. Specifically, 1% rise in bank loans to real economy resulted in a sharp positive +0.65% increase in non-oil output in the medium term, while the long-run impact was twice weaker +0.36%. A notable point is that within one quarter about 88% of short-run deviations demonstrated their convergence to the long-run equilibrium. Indeed, certain fragilities are still remaining in small open economies, where “the economic growth may experience larger fluctuations according to the credit boom explanation of the business cycle”.
In general, these studies came up with an empirical evidence indicating a vital role of financial sector enhancement (expressed in the volume of bank credits) in boosting economic activity. Hence, macroeconomic policy makers are suggested to legislatively support and strengthen financial intermediation process through efficient mobilization and allocation of capital flows, but controlling for overinvestment.
