Bank Lending to the Private Sector and GDP Growth: Thresholds and Returns

Demetris Koursaros (), Nektarios Michail and Christos Savva ()

No 2016-2, Working Papers from Central Bank of Cyprus

Abstract: We examine the relationship between lending to the private sector and GDP growth using a two-period model and test model conclusions through a Smooth Transition Conditional Correlation (STCC) model for the G7 countries. Theory suggests that the correlation between private lending and growth is positive and this relationship exhibits diminishing returns after a threshold. The empirical exercise confirms that this relationship holds, and while thresholds exist for most countries, the correlation between private lending and growth is never negative. Overall, the evidence indicates that policy should not emphasise the level of lending but its allocation in the economy.

Keywords: private debt; correlation; bank lending; threshold; policy (search for similar items in EconPapers)
JEL-codes: C32 E51 E60 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-02
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